I revised my answer above, to add "In addition to the expenses, you paid with your distribution, also enter the expenses that were paid by the scholarship. This will show that scholarship paid the same amount of expenses (as the non qualified portion of the distribution) qualifying you for the penalty exception. "
If her income from working was less than $14,600, she can declare some of her scholarship as taxable to reduce the amount of the 529 distribution that is taxable and subject to the kiddie tax.
