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This is a known glitch in TurboTax (TT). They are working on it (no announce fix date). The 2025 education and 529 sections appear totally redesigned, from last year.
Same issue on the 2025 desktop Premier version.
Can't enter expenses I paid with the 529 plan and thus it is assuming it is taxed and applying the 10% penalty.
Can't continue my tax preparation until this is fixed.
After reading many documents on the IRS site, apparently the solution is to just not enter the 529 info. IRS says to consider the 1099-Q informational if all the money was used for qualifying expenses there is no need to report it.
The 1099-Q is only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview (even when it was working) is complicated and it's easy to make mistakes. Avoid it if you can and you probably can.
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 (you don’t need it). 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.
References:
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