@Majk_Mom said "the only other expenses we have are all housing or food costs above the school's COA".
Then you cannot allocate those costs to the 529 distribution. As you appear to know, your qualified living expenses is limited to your actual costs or the school's allowance for "cost of attendance" (COA), whichever is less. But, that also means that scholarships did not pay for "qualified" living expenses and cannot be used for the penalty exception.
Q. So, are you saying taxable scholarship is just income, so we can use it for whatever we want and simply report it and it increases our 529 QEE?
A. Yes, but subject to the COA limit.
Q. How does this relate to the 10% tax penalty?
A. Expenses that exceed the COA were not "qualified" living expenses and cannot be used for the penalty exception.
Q. So would I assume my 529 QEE total from earlier stays the same, but my NQEE total is reduced to $747 after allocating the 2nd taxable scholarship. Is this right?
A. Yes, assuming the $747 is the amount living expenses exceed COA.
