It depends on what the 1098-T is reporting in Box 1 and Box 5 and also if the program is generating an education credit.
If your 1098-T shows excess tuition paid in Box 1 over scholarships posted in Box 5 in the amount of as much or more than the distribution, the distribution can be tax-free.
If the distribution was used to pay room and board, the distribution would be tax-free.
However, if expenses in Box 5 are being allocated to an education credit, that amount of expense can no longer be used to offset a scholarship or distribution.
To make things work better in TurboTax, enter Form 1099-Q first. This way the section that asks for additional expenses will include Room and Board.
When you are at the end of the education interview, if you click "Maximize my tax break" you are allowing the program to tax part of the distribution if it results in a credit since the credit is usually more valuable than the tax on the distribution.
If you don't want the program to make that decision, type letme into the search, click "jump to letme" and change the selection made.
Or, if you understand what you do and do not want to do regarding Form 1099-Q, Form 1098-T and Education credits, and that is to match the expenses with the distribution and scholarships (if applicable) and everything evens out, keep a copy of the forms, receipts, and calculations with yout tax file but don't enter them into the TurboTax program.
Those forms are used to make calculations, they are not listed to match the IRS if there is not credit (or taxable income generated) involved.
IRS Pub 970
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