The TurboTax (TT) interview is complicate and it's easy to make mistakes. Don't enter the 1099-Q if you don't have to. And you don't.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home*) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
References:
- On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
Another thing to beware of: 529 money can be use for off campus living, but you are limited to the lesser of your actual costs or the school's "allowance for cost for attendance" (basically what on campus students pay for Room & Board). The student must be half time or more.
You don't mention whether you are eligible for and are claiming the tuition credit TT will allocate up to $10K of tuition to the credit (although only$4000 is usually needed). You will eventually reach the screen "amount used to claim the education credit". If TT has not prepopulated that with $4000, you should enter (or change to) $4000.
You also don't mention scholarships, which TT will also allocate expenses to.
To get the screen to enter Room & Board, answer yes when asked if you have book expenses.
