You didn't say who's name and SS# the 1099-Q is in. The 1098-T is always in the student's name. But, it doesn't matter. Her board alone is, most likely, more than the $3500 distribution. Room and board are qualified expenses for a 529 distribution, but not for a tuition credit.
So, You can just not report the 1099-Q, at all. 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.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
The TurboTax interview can theoretically handle this, but it's just too complicated. For example, you must enter the 1099-Q before you enter the 1098-T and expenses. In your case, just delete the 1099-Q. It does not need to be entered.
You don't say whether you will be claiming the tuition credit.
