Coordinating ESA Distribution with AOTC

[chamnessd]

I originally posted this under someone else's question in an attempt to keep similar questions together.  I believe that was a mistake as I got answers that were unrelated.  So I am reporting this question on a separate thread. 

I qualify for the AOTC and also took a distribution from an ESA.  What should happen is the qualified education expenses should apply to the credit first and then the ESA distribution.  The example in chapter 7 on p54 of publication 970 under the subheading Coordination with American Opportunity and Lifetime Learning Credits illustrates this.  Here is my example with the way I believe the education credit should be calculated:

Total Qualifying Education Expenses:            8829.46

Room and Board (Commuter)                                 0.00

Scholarships                                                       <3710.00>

Adjusted Qualifying Education Expenses:   5119.46

Expenses Applied to AOTC                            <4000.00>

Expenses Available for ESA Distribution      1119.46

ESA Distribution                                                 3343.00

ESA Distribution subject to Tax                        2223.54 ignoring the tax basis for simplicity

However, TurboTax is calculating it this way:

Total Qualifying Education Expenses:            8829.46

Scholarships                                                       <3710.00>

Adjusted Qualifying Education Expenses:   5119.46

ESA Distribution                                               < 3343.00>

Education Expenses available to AOTC      1776.46

Now perhaps I am missing an entry somewhere (and I have searched for this entry) that tells TurboTax how much of the ESA Distribution to use and how much is taxable.   It also appears that there was a change in TurboTax because I get this screen:  We'll make this entry zero that's no longer needed.  Earlier you told us to treat $0 as taxable education distribution in order to claim a larger education tax credit or deduction.  However, it's no longer beneficial for any amount to be treated as a taxable distribution and used for an education credit or deduction, so we will make this entry zero.  I am not sure what this means or why TurboTax is telling me this.

I have the desktop version of the Home and Business version using Windows 10 OS.  The version number is [phone number removed] 

Can someone please help me?

[AmyC]

Yes, A commuter still has food expenses for while on campus. No student is expected to go all day without eating. Look at meal plans or actual spending, I bet a good chunk, if not all, of the remainder you figured, should go towards food.

Once you have the $1300+ from ESA out of the way, the program will figure the correct AOTC.

[chamnessd]

Thank you for your response.  It turns out the answer to the question lies in the Pub 970 example I cited in my question.  The example in that reference is referring to the student's taxes and not the parents.  While the parent gets to use the expenses to determine the AOTC they have nothing to do with the ESA Distribution.  So you have to enter the expenses on both parent's and student's return. However, the student is the one that has to process the 1099Q exclusively on their tax return.  In TurboTax there is an entry for the student to deduct the expenses used by the parent to calculate the AOTC.  In my case I was trying to process the 1099Q on the parent's return.

I will look into the meal expense that you recommend.  Thank you for that tip.

[AmyC]

I love pub 970. You might like to look at another of my answers for help  The student only has to enter any taxable income. Since the parent is claiming, the parent claims the credits.

The student has several options for how to enter the income once it is decided on the amount and where it is coming from. There may not be any income to report.