taxmom50,
I was not as sharp as I could have been yesterday. 529 funds are not scholarships or grants, so they do not count as unearned income and are not subject to the kiddie tax if they are used for qualified expenses. They are funds the student beneficiary brings to the table.
That said, it still may be advantageous to count some of the $5,000 as if it were spent on unqualified expenses. This is discussed in https://ttlc.intuit.com/community/retirement/discussion/are-non-qualified-withdrawals-from-a-529-pla... which, to briefly summarize, points out that for some parents it can be possible to obtain the American Opportunity Credit by that means, shifting, say, $2,000 to the student's income (less than the $2,100 kiddie tax threshold) and thereby treating that money as being applied to the AOC educational expenses. Even with the 10% penalty on the $2k plus, of course, income tax on the $2k at the child's rate, the family comes out ahead with a $2k credit, 40% of which is refundable. Of course one wouldn't do this if they already qualified for the full AOC already by having spent $4,000 out of pocket on qualified educational expenses.
