We didn't receive any grants, just a $1000 private scholarship. Here's my best recounting of what I did on Turbotax and the figures involved: when I first went through the interview, I think I checked the box saying I had not received a 1099-Q (because I hadn't yet), but did enter the $16,596 in expenses from the school's 1098-T, another $845 in required expenses plus $120 in nonrequired expenses, and the $1000 scholarship (so $17,561 in expenses minus the $1000 scholarship). Then Turbotax went through the calculation to determine that we would get the $2500 AOTC. Later, after receiving the 1099-Q, I entered the data from the form, which included $17,915 in distributions from a 529 account ($10,253 in earnings, and $7,662 as the basis). That is when the projected tax refund dropped almost $2,000. My best guess (after doing some reading in Publication 970) is that the fact that I'm getting the $2,500 AOTC is reducing the amount of 529 distributions that are tax deductible. Is that possible, and does that sound right? If so, it's eye opening to realize that not every single dollar used from a 529 is tax free!
