When you entered the 1098-T, you were asked how much of the expense you wanted to allocate to the education credits,  If you made no entry or selected all the expenses, then the only expenses left over to make the 529 distribution nontaxable would be those expenses not eligible for the credit, such as room and board.  Go back through the education credit interview and make an allocation selection.$4,000 allocated to the  credit will maximize your credit and allow the balance to be allocated  to the 529 income.  Allocating 0 to the credit allows all expenses to be allocated the 529 money