Yes, you are correct that the $3,000 which was appeared on your pay-stub is included in Box 1.
By entering your W-2 as it was issued to you, you will be properly documenting your return in TurboTax.
You are also correct that because the tax free amount of $3,500 was less than the $5,250 maximum that you do not need to make any other adjustments to your tax return in TurboTax.
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