Since the bond interest is not taxable, you are using tax free income and don't qualify. However, you can pay taxes on the bond interest to claim the AOTC. You only need $4,000 of qualified tuition and expenses to claim the full amount. The rest of the bond interest can be deducted on form 8815.
The bonds have to meet certain requirements for the interest to be excluded (deducted) from your tax return. The interview asks those questions and disqualifies you if you answer wrong.
There is an income limit for the exclusion (modified adjusted gross income [MAGI]). The MAGI includes the interest you want to exclude.
After entering your 1099-INT (with the interest in box 3), TurboTax (TT) will ask you to enter your education expenses.
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