@KrisD15 is correct: You do not want to allocate the the 529 distribution to student loan payments. There a $10,000 lifetime limit on paying student loans with 529 funds. You don't want to use up $8424 of that limit when there are some other qualified expenses available (excess tuition, room & board, and books).
Also, as KrisD15 said, what you do with the 1098-T depends on her dependent status. Students, under 24 are not usually eligible for the American Opportunity Credit. It is usually better if the 1098-T goes on your return.
The 1099-Q is only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can.
QTP 529 QTP You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home), or student loan payments, to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records (you don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
References:
- On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
- ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form."
The student loan interest is only a deduction (technically, an adjustment to income), not a tax credit. So, the $279 is of limited value.
