Why would 529 earnings be taxed if qualified tuition greater than withdrawal amounts?

[mwvarner]

My wife and I each contributed to a 529 in 2018 with her as the beneficiary. She is in a full-time degree program with tuition that we paid in 2018 (around $7200) as reported on 1098-T. We took distributions from the 529s later in 2018 of around $2500 from each account (reported on two 1099Qs, both with her as the beneficiary). One of the accounts had earned $17 since it was opened, and that amount is showing as taxable in TurboTax. She had a $500 scholarship, but our net tuition expense in 2018 was still $6700. Why would any earnings on 529 be taxable if used for qualified tuition expenses? I can't figure out why TurboTax won't apply the tuition we paid.

[Hal_Al · Accepted solution]

TurboTax uses parts of you college expenses to claim the Tuition credit. That reduces the amount that can be used to claim the 1099-Q as being totally tax free. 

If your income is too high to claim a tuition credit, see https://ttlc.intuit.com/questions/4451709-why-is-the-529-distribution-from-my-1099-q-showing-up-as-t...