Rick and Bill hit the details of how the taxation works.  All I can add there is if the total expenses before allocating any to the T are less than the amount withdrawn on the Q, then there will also be a penalty.  If you are looking for a more detailed example of how it works, try working through the search (I know, it stinks) as I have posted on this topic more times than I can count.

As to how you get the program to make it work, you have to link ALL the Q forms to the T.  It seems like in your case there is only one but you need to verify that.  Make sure the OWNER of the 529 did not also get a Q as that would also need to be part of this calculation.  That means it could be someone whose return you are not doing, like grandma.  In my opinion, the program handles the T and the Q calculations superbly.  You just need to make sure all the proper boxes are checked and that all Q forms from all 529 accounts for this student are linked to the T.  The program will compute the amount of taxable income and amount subject to penalty, if any, to every recipient of a Q.  This does sometimes result in a family blowout as the grandparents on the other side of the country already filed and now end up being told they have additional taxable income because mom and dad are claiming a tax credit.