W-2 income is entered separately (on line 1a of form 1040) from the 1098-T amounts. There is no intertwining between W-2 income and the 1098-T despite the fact they both came form the school.
If box 5 of the 1098-T is more than box 1, TurboTax will treat the difference as taxable income, unless you enter additional expenses. If box 5 of the 1098-T is more than box 1, you are not qualified for a tuition credit because all your tuition was paid by the tax free portion of the scholarship. You have the option of declaring more of your scholarship taxable, in order to free up tuition for the credit. The Lifetime Learning Credit is 20% of tuition. If you are in a lower tax bracket, there would some advantage to doing so.
