It sounds like you're doing the first part right. Earlier you said he had more than $5050 of income. If he's getting a $2500 non refundable credit, he has a lot more than $5050 of income.
Q. Why is he getting additional income to report for earning on the 1099-Q box 2?
A. That's not unusual. See the general discussion on 529 distributions above. Diverting (re-allocating) some of the expenses from the 1099-Q to the tuition credit is one usual cause. For more specific help, provide your numbers.*
Q. Is this the "Kiddie tax?"
A. Yes or maybe partially yes. The kiddie tax is applied to any unearned income. If some of the 1099-Q is taxable, it is considered unearned income.
*Provide the following info for more specific help:
- Are you the student or parent.
- Is the student the parent's dependent.
- Box 1 of the 1098-T
- box 5 of the 1098-T
- Any other scholarships not shown in box 5
- Does box 5 include any of the 529/ESA plan payments (it should not)
- Is any of the Scholarship restricted; i.e. it must be used for tuition
- Box 1 of the 1099-Q
- Box 2 of the 1099-Q
- Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
- Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
- Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
- How much taxable income does the student have, from what sources
- Are you trying to claim the tuition credit (are you eligible)?
- Is the student an undergrad or grad student?
- Is the student a degree candidate attending school half time or more?
