Q. On my return you are saying only enter 4000 for box 1 of 1098-T and 0 for box 5
A. Yes
Q. And then on my daughters return, follow the workaround and enter $1,186 as the amount?
A. Yes
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Q. On my return you are saying only enter 4000 for box 1 of 1098-T and 0 for box 5
A. Yes
Q. And then on my daughters return, follow the workaround and enter $1,186 as the amount?
A. Yes
Q. I don't need to enter the 1099-Q on either mine or hers? And if I follow the above, I should be all set?
A. Yes and yes. Verify that it shows up on line 8z of Schedule 1.
One other after thought: It's unclear, to me, what the $1000 room & board (R&B) scholarship is and why isn't it included in box 5 of the 1098-T. Although it was issued for R&B, is it restricted to R&B? Technically a scholarship restricted to R&B would be taxable income to the student (R&B is not a qualified expense for tax free scholarship). But, if it can be used for tuition, then deducting $17K instead of $16K is correct.
In other words, if you're sure there was actually $17K of scholarship, and not the $16K shown in box 5 of the 1098-T, then use the original calculation of $1691 as the taxable amount of the 529 distribution, rather than $1186.