State review reduced refund amount

I used Turbo Tax and it calculated a refund of $1658 from the State of Michigan.  At the end of June, I received a letter from the state indicating that they reviewed my return and it said "Your claimed subtraction for the Michigan Education Savings Program...was adjusted to agree with the amount included in your adjusted gross income (AGI) on your federal return." My refund was reduced to $620.

I believe this reduction is in error - either that or Turbo Tax mis-calculates when MESP funds are used for payment of approved college expenses.  I withdrew funds from the 529 account to pay my daughter's college fees, so it should not have counted toward AGI.  Has anyone else run into this and how did you resolve it?