Error in "Adjusted Qualified Higher Education Expenses applied"?

The TurboTax interview is complicated.  If you know none of it is taxable, You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

For others reading this, You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

@322351  said "The child is not eligible for any Education tax credits since the child is in graduate school and we did not attempt to claim them on either my return or the child's return".

Graduate school means the student is not eligible for the more generous American Opportunity Credit.  But he is eligible for the Lifetime Learning Credit (LLC).  If he is your dependent, you claim it on your return.  Your income must be less than $138K (Married filing Jointly) Raised to $180K in 2022.

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $17,718 in educational expenses(including room & board)

   -$4950 paid by tax free scholarship***

   -$7609 used to claim the LLC

 =$5159  Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $17718

Box 2 is $3727

5159/17718 =29% of the earnings are tax free; 71% are taxable

71% x 3727= $2642

You have $2642 of taxable income  

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

Example:

Student declares his $4950 of scholarship as taxable income
  $17,718 in educational expenses(including room & board)

   -$10,000 used to claim the LLC (to get max. $2000 credit)

 =$7,718  Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $17718

Box 2 is $3727

7718/17718 =43.6% of the earnings are tax free; 56.4% are taxable

56.4% x 3727= $2103

You have $2103 of taxable income  

So, why have the student report $7053 (4950 + 2103) of income, rather than $2642?  It's complicated.  First there's the additional LLC the parents get (about $478). Scholarships count as "earned income" for  a student-dependent's standard deduction. So, the student has only $1753 (7053-4950 -350) of taxable income vs. $1542 ($2642 - 1100) the other way.  He pays about $25 more tax to get the parents $475.