Box 1 of Form 1098-T typically includes scholarships and grants. If that is the case, then only $3,594 of the $9,481 in payments qualifies for the favorable tax treatment. In order for the remaining $7,594 of the 529 distribution to be tax and penalty free, you will have to report other qualified education expenses. Education expenses that qualify for free withdrawals include tuition and fees, room and board, books and supplies, and computers, For more information on expenses that qualify (and those that don't) see the following: 529 Qualified Expenses: What Can You Use 529 Money For?
In addition, any payments that are treated as a tax free withdrawal from a 529 Plan cannot also be applied towards an education credit.
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