You'll only need to treat $4000 of the scholarship as taxable to wipe out the tax on the 529 earnings (and the need to even enter it on your return). If that $4000 plus his summer job income is less than $14,600 there will be no tax and no kiddie tax to deal with. Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450). It is not earned income for the kiddie tax and other purposes (e.g. EIC).
That said, here's quick workaround in TurboTax, for handling the 529 earnings.
Enter the 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. Also enter the amount of the scholarship plus the $4000 you used for the credit in the box "Tax-free assistance". This reports the earnings as taxable and claims the scholarship/tuition exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.
