The 1099Q, if taxable, is taxable to the recipient. In you case, that is the daughter. It is not optional. In the case you set out, it is NEVER taxable to the parent since it is under the daughter's SSN. (Not talking here about Form 8615).
A 1099Q can be reportable even if all was used for educational expenses. You are only allowed to chose ONE federal benefit for any given dollar of qualifying expenses. So lets take a simple example. You have $10000 of qualifying Q expenses, made up of $4000 of room and board and $6000 of tuition. You have a Q withdrawal paid directly to the school of $10000, equal to exactly the amount of qualifying Q expenses. Thus, the Q will come in the daughter's (student) SSN.
The qualifying expenses for the T are only the $6000 of tuition. The parent uses $4000 of T expenses to claim the AOTC. There are now, for purposes of the Q, only $6000 of qualifying expenses. Since $10000 was withdrawn, but there are now only $6000 of remaining expenses, daughter will have tax on a portion of the Q earnings. However, since in this case the only reason there are not enough expenses is because one federal benefit (AOTC) was chosen over another (exclusion from tax on 529 earnings if used for school), the daughter will only have tax but NO penalty.
This is only a simple example. There are other expenses that can qualify for the T, and thus the Q, other than tuition. But the bottom line is you have to look at the totality of what happened by corralling the T, all Q forms, and determining who is getting taxed on what. This includes grandma who lives six states away but also got a Q because she she owns the 529 and got reimbursed from the 529 for amounts she paid to the school. The program does an excellent job doing this if all Qs are entered properly and linked to the T.
