Q1. Is the 1099-T reported on my (parent) tax return, my daughter's or both?
A1. Your daughter's, because you are not eligible for a credit and she was, technically, the "recipient" of the 529 distribution. The 1098-T is only an informational document and does not need to be reported unless it affects your tax return. It can go on either the student or parent's returns and sometimes both (with adjustments).
Q2. Is the 1099-Q reported on my (parent) tax return, my daughter's or both?
A2. Your daughter's. When the 529 distribution goes directly to the college, the student is treated as the recipient of the funds. The 1099-Q is also only an informational document and is only reported when needed.
Q.3. Can the 529 plan distribution for the scholarship amount be paid directly to me (parent) without triggering any penalties?
A3. Yes. The scholarship penalty exception applies regardless of whether the beneficiary (student) or the owner (parent) is the recipient. If any of it is taxable, the student may pay a little bit less tax because of their lower tax rate, depending on what other income the student has. But, the "kiddie tax" (where a dependent's income is taxed at the parent's tax rate) kicks in after the first $2500 of unearned income (2023). The scholarship exception applies only to the 10% penalty (for a non qualified distribution). The earnings portion, of the distribution (usually box 2 of the 1099-Q), is still taxable.
An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q (and/or tuition credit, for eligible parents). Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $13,850 of taxable scholarship (in 2023) and still pay no income tax.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement (2023) and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (e.g. EIC). Taxable earnings distributions, from a 529 plan, is unearned income (the student's standard deduction is only $1250).
