Q. I will drop the 1098-Q from his return, and only include the 1099-T?
A. Yes.
Q. Do I still claim him on our return to get the $500 ODC?
A. No.
Q. Should I NOT claim him this year - even though he would be eligible?
A. Yes. You lose the $500 ODC, but he gets the AOC, $1200+/- or $2200+/-, depending on how he answers the support question in TurboTax (my earned income provided more or less than half of my support).
The actual wording in the IRS pub/instructions is "your earned income was less than one-half of your support". My interpretation of that is that you must have actually spent your earned income on support. Others, in this forum, have argued that you must only have earned income that exceeds half your support.
$26,000 is enough that you are probably safe in just saying no one can claim him as a dependent, unless you want to go thru the support calculations.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
