Q1. Do I need to claim my 1099Q Box2 earnings ($3244) portion as income on my return and pay the associated tax, as I won’t have any education expenses to offset?
A1. Yes. As the recipient, you must report it. You cannot opt for the beneficiary to report it.
Q2. If I must claim, how do I prove that this was for a scholarship withdrawal and not be required to pay a 10% penalty?
A2. You don't have to "prove it" at the time you file your tax return. You just say it's so, if your calculations show the student-beneficiary had enough scholarships for both 2099-Qs
Q3. How do I enter these earnings, while stepping through TurboTax questions? Is there a way to manually add and where?
A3. You can make entries directly on form 5329 in the download versions of TurboTax (TT). But that will prevent you from e-filing. With the online versions, you have to use the interview. But your situation is particularly easy in TT.
Instead of entering the educational expenses in the education expenses section, enter it in the 1099-Q section of TT. When asked who is the student, check "someone else not listed here". On the next screen, enter the real student's name. This will eventually give you one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there.
After entering your expenses (of at least the amount box 1 of your 1099-Q), enter the same amount in the box “Tax Free Assistance”. TurboTax will prepare form 5329 to claim the penalty exception, for the scholarship and other assistance.
