Thank you for the reply - it's very helpful.
Putting this all together, am I correct that we can do the following?
1) Allocate all $20,000 of the 1098-T expenses to the parents' return. Since distributions to the parents totaled $25,000, 20% of the earnings on the parents' 1099-Q are taxable. Report that on the parents' return and pay tax and penalty on those earnings there.
2) Since there are no expenses left to allocate to the student's return, 100% of the earnings reported on his 1099-Q are taxable. Report those on his return and pay tax and penalty on them there.
You are correct that we are income-disqualified from taking the AOTC.
