Penalty on ESA/529 withdrawal due to scholarship

[f_comm_tt]

I haven’t found a way to prevent TurboTax from applying a penalty to the withdrawal. I would expect that after entering the scholarship amount in Box 5 of Form 1098-T, TurboTax would use that information and avoid applying the 10% penalty. Is that correct, or am I missing something?

After the latest update I was able to enter R&B expenses but no other entry that would apply to avoid this penalty.

Is there any workaround for this?

[Hal_Al · Accepted solution]

Yes, the way you describe is how it should work. 

One problem, I've seen, and it carries over from last year, is that TT has allocated $10,0000 of expenses to the tuition credit, instead of the more appropriate $4000 (or $0 if you  are not claiming the credit).  In the past, TT provided a screen  titled  “education expenses used for a tax credit”. It was usually prepopulated (often with $10K). You could change it for the amount you want to allocate to the ed credit. So far, this year, I haven't found that screen, even after recent updates.

If you don't get that screen, you can check the student information worksheet. You can manually change it there (line 18). Make the change in the first column, on the left. It was line 17 prior to 2025.