coordinating lifetime learning credit with 529 distribution

[RWG1950]

Customer's qualifying child is 23. Graduate student box 9 on the 1098-T is checked. AOC was claimed prior 4 years.
Have reviewed IRS pub 970 & TTB but I'm still having trouble understanding the coordination between LLC & the 529 distribution.
The 1098-T shows : $ 21,679 box 1 payments for qualified tuition received by the college / $ 7,650 box 5 scholarships
The 1099-Q shows : $ 15,241 gross distribution / $ 32,238 earnings / $ 47,480 basis
In addition to the above tuition, $ 4,750 was paid for housing.
I know the same expenses cannot be used for both. It seems the LLC is more valuable to the taxpayer than the 529 exclusion.
How to calculate how much (if any) of these educational expenses can be used for the LLC is what I need to know.
Can anyone offer insight on how they would handle this ?
I'd sure appreciate any comments

[Lion]

https://www.irs.gov/pub/irs-pdf/p970.pdf

See especially the sections on coordinating benefits in chapters 7 and 8. You'll have to run the numbers to find the best outcome for your clients.

[RWG1950]

Customer (MFJ) is 12% marginal federal.
The optimal allocation seems to be apply $ 10K of the net qualified tuition to the LLC to get the full $ 2K credit.
Then allocate the net of everything else to the 529.
If it's done this way, he'd apparently pay tax on about $ 7K or so of the 529 distribution's earnings.
Is this amount subject to the 10% 529 distribution penalty ?

[BP.]

Could you please double check the 1099Q numbers you posted?

You have to do what Lion says, and look at the formula on p. 59, Pub 970, or TTB p. 12-6.

On a piece of paper, or in a spreadsheet, set up the formulas, and plug in your numbers.

Apply education credits first, then see what prorated portion of the earnings are taxable.

As far as your last question, check TTB 12-7 for exceptions.

[RWG1950]

BP & LION : The 1099-Q figures are accurate as posted. The earnings amount is shown as -$ 32,238.
Hadn't seen a Q having this -mark in front of the earnings before. It is an older 529. Have no reason to believe it represents loss.
Looks like allocating 10K of the tuition to LLC and remainder (including housing) to the 529 would work out best for the taxpayer
My software has a worksheet that calculates the taxable amount on 529 earnings.
The 529 distribution penalty is apparently negated per entry of the amount on the 5329.
Thanks for your comments.

[BP.]

The earnings amount is shown as -$ 32,238.
Have no reason to believe it represents loss.

I didn't see where in the original post it was as reported negative earnings.

It is a loss. See Pub 970 p. 60 & 1099Q instructions.

If there were no earnings, then why would anything be taxable?

[RWG1950]

You're right. Original post didn't say this. Confirmed w/the 529 custodian that the $ -32K did represent a loss.
As this loss would ordinarily be a schedule "A" misc deduction that no longer exists, I'm guessing there is no further recourse on it.
Looks like the thing to do is to claim the $ 2K LLC.