Sorry, I was not referring to not counting the child as a dependent.
I was referring to IRS 929 to determine which standard deduction a dependent can take which says on the definitions page :
Earned income
Salaries, wages,tips, professional fees, and other amounts received as pay for work actually performed. For purposes of determining a dependent’s standard deduction, earned income also includes any part of a scholarship or fellowship grant that the dependent must include in his or hergross income.
As I said before, OP should probably read the stuff, work alone or with a professional and just keep all the stuff to show the reasoning. The earnings portion of the 529 distribution is the part we are all talking about, and it usually won’t be all that high, but so much depends on the family income, student income, scholarships, amount taken from the 529. What works for one situation probably won’t work for another.
You can google this all day and get contradicting opinions from tax experts (especially on the question of taking out to offset a scholarship and whether that has to occur in the same year as the scholarship was awarded.) Because of that, we decided to follow the IRS instructions and flow charts, pay taxes, and move some but not all money out while she was in school to avoid the penalties. Now she’s in graduate school but still fully funded, she is now independent, and some money is still in the 529.
In the end, you do your best, pay some taxes, and keep all your paperwork. Definitely don’t take any advice besides that from me.