When doing the math (like the example above) you have to take into account the grandmother's 529 too. It doesn't matter that the beneficiary is your dependent and not grandma's.
Expanding the example: your 1099-Q was for $2500 and grandma's was also for $2500. We know that $240 must be reported as taxable income. You could each report $120 on your respective returns. Or you could report the entire $240 and grandma none. You may split it any way you want, so long as you don't report more than your box 2 amount as taxable income.
