What is in boxes 1 & 2 of your 1099-Q? What are you actual education expenses? Then what are your adjusted education expenses after allocating some expenses to the tuition credit.
The statement " $23,000 distributed, $20,000 education expenses. Leaves $3,000 taxable" is not correct. You need to know the box 2 amount, in order to calculate the taxable amount
Here's an example of how the calculation works:
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
