Here’s the short cut entry method in TurboTax:
Enter his 1098-T with $0 in box 1 and $7256 in box 5. Do not enter any other amounts. That will put $7256 of taxable income on line 8r of his schedule 1.
Because we are going to make a designated amount of the student-recipient’s 1099-Q taxable, it’s best to use a workaround, rather than counting on TT to come up with the right answer.
Enter his 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter the amount of tuition as $23,827. Enter $3205 as the amount of tax-free assistance*. The last entry makes $3205 of the distribution unqualified but also applies the scholarship exception to the penalty.
On your return: Add the 1099-Q numbers together and make one 1099-Q entry (beware of rounding; box 2 + box 3 must equal box 1). When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses (don't enter anything in the education expenses section). Press Done at the 1099-Q summary screen, to get there.
For tuition enter $30844 (54671-23827). R&B $5850. Books $198. For tax free assistance, enter $11,539 (22,000-3205-7256= 11539)
* We want him to have $1250 of taxable income. The first $1250 of unearned income is taxed at the student’s marginal rate (10%). The earnings portion of the 1099-Q is 39% of the distribution (9271/23827=0.39). 39% of X = 1250. X=1250 / 0.39. X = 3205 (we are making $3205 of the distribution unqualified).
