I agree. The issue is that the form provided by the 529 plan (about which TT asks) only includes total distributions and the earnings/contribution break-down. There's no further break-down for what I'll call "non-allowable, but not penalized, withdrawals".
So, for example, if tuition is 10k and R&B is 15k and earnings is 40%, and the grant covers full tuition, if I withdraw $25k, the form will show
$25k withdrawal
10k earnings
15k contributions
It does not show $4k anywhere (the earnings part of the $$ associated with the grant) to be taxed. I recall doing a test-run in TT last year (before having done the grant withdrawals) and TT penalized the full earnings. I got the impression that I would have to enter it manually (on schedule 1?) and TT advised against that. However, going through the Q&A route to filling out the return didn't have a spot to specify what part is taxable.
It would be convenient if the 529 form had (with above example numbers)
- Allowable no penalty, no tax, earnings and contribution ($6k and $9k)...i.e. R&B
- Not allowable, penalty and tax, earnings and contribution (none)
- Exempted from penalty, but not tax, earnings and contribution ($4k and $6k)....i.e. tuition/grant
And, having software accept those numbers directly.
