Hi,
I just wanted to circle back and thank you for the help and confirm that it was a misunderstanding on my side. There was no tuition credit involved. The simple answer is that the 1098-T report of qualifying items does not include room and board, while 529 qualifying items does include room and board. A little bit of trickiness thanks to the government using the same qualifying items terminology for both, but they are different items.
The deceptive part of it for me, personally, was that the room and board and scholarship amounts were almost equal, so it appeared that the 1098-T was reporting total cost (including room and board) with scholarship removed. This is why I had not added room & board separately. But that was wrong. Once I realized that Box 1 of the 1098-T was total cost of tuition and related costs and fees ONLY, without room and board, and without scholarship deduction, and completed the room and board line in Turbotax, the taxation on the 529 withdrawal went away and my refund returned to its original amount.
