Assuming the $12920 was paid in 2024, there is enough room and board ($12920) to cover both 1099-Qs. Both the parents and the student do not need to enter their 1099-Qs. Even though your 529 money actually went for tuition, at tax time you are allowed to "allocate" it to R&B.
Otherwise, the student will need to report some of his 1099-Q box 2 amount as income. But, he will not pay any tax, as the credit will, wipe it all out.
Two more questions need to be answered regarding the student's dependent status. For the fall term, did the student enroll in August or September? Did the student still live with the parents during his "time off".* Either way, the student can claim the tuition credit if the parents should forego claiming him as a dependent (even if they can claim him). What's still unanswered is whether he gets the refundable portion of the AOC ($1000).
Worse case: the parents forego the $500 dependent credit and the student only gets a $490 AOC or Lifetime Learning Credit (LLC) (in this case take the LLC and save the AOC for a later year).
*There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
