How should I handle this situation within Turbotax? When entering the 1098-T form information in TurboTax, should I reduce the box 1 amount by substracting the payments made for on-campus housing? Any help would be greatly appreciated. Thanks.
Yes, please select "This is not what I paid to the school" under Box 1 on the 1098-T input screen and enter the adjusted number reflecting tuition only.
Later you may report the room and board if it relevant (to offset a 529 distribution for example).
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You should report this error to the school. You don't need to to file your taxes.
But that so wrong that it's hard to believe a school would make that kind of mistake. There may be something else going on here.