In TurboTax (TT), you enter all the student's info and TT calculates the taxable amount, sees the scholarship and applies the penalty exception. It prepares form 5329 to document the penalty exception. That's how it's designed. Unfortunately, it doesn't always work well.
It's important that you enter the 1099-Q before you enter the 1098-T and other expenses. Answer yes when asked it you have book expenses. That will get you the room & board entry box, as well as books and computers. When you enter the scholarship amount (box 5 of the 1098-T), reduce the amount you enter by the amount the student paid tax on*. Even though you are not eligible for the tuition credit, TT may assign some of the expenses for the credit. In his interview, you may eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is 0.
* If the student has no other income, other than the scholarship, he should report $12,550 of it as taxable. That's his standard deduction, so he will pay no tax and free up about $5550 of expenses for you to use on the 1099-Q. You say the student paid some tax (on his taxes) on the portion of the scholarship that went beyond tuition and room/board (R&B). That's wrong. The part that pays R&B is not tax free. So, since he has to pay tax on it, you should claim the R&B to reduce the tax on the 1099-Q. If he has already filed, you should consider amending his return.
