You receive a 1099-T with qualified expenses in box 1 and scholarship in box 5. The scholarship in box 5 is assumed to be used to cover the tuition in box 1, unless you tell TT otherwise. The way you do that is to tell TT you used the money for room & board (an unqualified expense). It's not really a matter of tracking every dollar and how it was spent. What you are doing is allocating sources of money (scholarship, 529 plan, employer assistance, out of pocket/loans) to the expense types to achieve the best tax result.
So, this is how you tell TT that some of the scholarship is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
