TurboTax assumes you will claim a Tuition credit, if you are eligible. So it reduces the amount used for the earnings exclusion, on the 1099-Q, for the amount used for the credit. You are not allowed to double dip.
Since the tuition credit is more generous than the earnings exclusion, that is the best way to file.
If you some reason, you are not eligible for the tuition credit, or do not want to claim it;
Go through the education section again. When you get to the screen that says “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.
Enter $4000 if you are claiming the American Opportunity Credit or $10,000 for the Lifetime Learning credit. Change it to 0, if you want it all applied to the 1099-Q.
Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.
