No portion of his tuition that was paid with a 529 distribution should be used in the calculation of an education credit. If the 1099-Q was used for other qualified education expenses, including books, supplies, or room and board, then he may use the remaining tuition expenses to claim an education credit if he is otherwise eligible for it. Given that he is graduating this year, he may not be eligible for the American Opportunity Credit, since it can only be claimed four years for an eligible student, regardless of whether he is claiming it or if you claimed it while he was a dependent.
He can also opt to not use the entirety of the 529 withdrawal to pay for his education, meaning some of it must be included on a tax return. The 1099-Q is taxed by whoever the recipient is, whether it is your son or his grandparents.
For example, if his semester of college costs $8,000 and he paid another $5,000 for his books and room and board. He received a distribution of $13,000 from the ESA to pay for everything. He may elect to claim $9,000 was spent on eligible education expenses, making the remaining $4,000 of his tuition eligible to be used for claiming the American Opportunity Credit, if he is otherwise eligible for it. The tax benefit he would receive from that credit outweighs the tax he would have to pay on the $4,000 extra income from the ESA, especially since only the earnings portion is taxed.
