Ok ... the program is trying to help you out ... you can use up to $10K to "pay" qualifying expenses to get the AOC of $2500 ... to do this $10k of the 529 plan distributions will need to be entered as income on your child's tax return and since the standard deduction for a Single dependent is $12K they will not owe taxes on that amount so it is a win win situation. Of course if the child has other income to report they may owe a couple of dollars but you still get the AOC.
