The 1099-Q needs to be entered FIRST, then the 1098-T. The program then gives you an option to "Maximize Your Tax Break". The program may suggest you claim some of the distribution if the credit is worth more.
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Go back into Expenses and Scholarships(form 1098-T) under Deductions & Credits and click Edit
- Click Edit next to the student's name and continue until you get to the "Here's Your Education Summary" screen (see screenshot) [NOT "YOUR EDUCATION SUMMARY SCREEN" move forward to "Here's Your Education Summary"]
- Scroll down on this page and click Edit next to Education Information (see screenshot)
- Continue through the interview questions, the last screen will ask how much you want to allocate to the credits (see screenshot)
This screen is important because it reports the total amount of expenses you have to work with, and how much of that you want to apply towards the education credit. If you do not want any of the distributions taxed, subtract the distribution amount from the total education expense and enter the difference. For instance, 10,000 expenses, 8,500 distribution, enter 1,500 and continue.
The distribution should no longer be taxed.
Again, you have the option to tax the distribution and take the credit. You can experiment by entering 4000 on this screen (the max for the American Opportunity Credit) and see if the tax on the distribution is less than the credit and results in a larger refund for you.
ADDITIONALLY, the distributions should always be made by the beneficiary or transferred directly to the school. If it is ever taxable, it should be claimed by the student and taxed at the student's rate.
WHY DID THIS HAPPEN? If you enter the 1098-T first, the program allocates ALL the expenses to a credit, then when you enter the 1098-Q, it is taxed.
