It's still not clear if he lived with you for more than half the year. The 4+ months living in the rental house, while in college, counts as living with you. But yes, if he did not live with you for more than half the year, then he cannot be your dependent.
In no case does he report the 529 distribution, on his return. You are the recipient of the distribution and the 1099-Q. If any of it is taxable, it goes on your return.
Yes, if he is not your dependent, he should claim the tuition credit. Even if he can be a dependent, you should forego claiming him (and the$500 dependent credit) to allow him to claim the credit.
Before, when we said the 1099-Q did not need to be reported, that assumed nobody was claiming the credit. The credit will "consume" $4000 of tuition. If there are still enough expenses left to cover the box 1 amount on the 1099-Q (after subtracting $4000), then yes the 1099-Q does not have to be reported.
Since you said you were not eligible for the credit, I'm assuming you didn't previously claim the American Opportunity Credit 4 times in the past. There's a 4 time limit. He would still be eligible for the Lifetime Learning credit, but the math isn't as generous, and we would have to look at the actual numbers.
