To qualify for the full $2,500 for the American Opportunity Credit, your wife would have had at least $4,000 worth of qualified education expenses. From what you entered, it sounds like she might not have had $4,000 but TurboTax took advantage of a little loophole to get you the full credit by making some of your 1099-Q distribution or scholarship taxable.
Even though you are paying taxes on the 1099-Q or scholarship, TurboTax determined that was outweighed by the benefit of receiving the full American Opportunity Credit.
To see what TurboTax is doing, you can go back into the Education section of your return in Federal > Deductions & Credits > Education > Expenses & Scholarships. Hit Continue and then Maximize My Education Tax Break.
