It's complicated.
CarolC's instructions are basically correct. But, be aware that TurboTax (TT) will try to maximize the education credit and thereby make some of the 529 plan distribution taxable. This works out best for most people.
If you want to change it to the method you describe (use only $858 for the tuition credit); 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. TT would have selected $3535, change it to $858.
