You can claim the AOTC. As previously advised, enter the 1098-T on your return and TurboTax will give you the tuition Credit ($2500, unless you have less than $1500 tax liability, in which case your tax will be reduced to 0).
You claiming the AOTC, will require allocation of $4000 of the tuition to the AOTC. This means she has less than $7476 of expenses, so some of the 1099-Q (529 distribution) will be taxable. So, she will have to enter the 1099-Q, on her return. She should enter the 1099-Q first, then enter the 1098-T (even though you already used it on your return) later in the educational expenses section of TT. Answer yes when asked if you have book expenses (that gets you the screen to enter room and board). In her interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording). Be sure the amount in that box is $4000. Her reportable amount of income will be $465.* If TurboTax arrives at a different number, or you have trouble with the program, reply back and I'll give you a workaround.
If you can come up with another $19 in expenses (a book, more food), she could actually avoid filing a return. Right now, I estimate she will have to file to pay $2 in tax. This assumes her $2721 of other income is earned income. Or, if you don't need the full $2500 of AOTC, to get to zero tax, on your return, we could shift $19 of tuition to her return.
* $9994 in educational expenses(4001 + 5993)
-$4000 used to claim the American Opportunity credit
=$5994 Can be used against the 1099-Q (on the recipient’s return)
Box 1 of the 1099-Q is $7476
Box 2 is $2344
5994/7476 =80.177% of the earnings are tax free; 19.823% are taxable
19.823% x $2344 = $465
There is $465 of reportable income (on the recipient’s return)
If TurboTax arrives at a different number, or you have trouble with the program, reply back and I'll give you a workaround.
