You should be allowed the penalty exemption for emergency expenses. I noticed when I edited a Form 1099-R entry in TurboTax I did not get the option to exempt the distribution from penalty, as I did not get the screen that says These situations may lower your tax bill. However, when I entered a new Form 1099-R I did see the option. I suggest you delete the entry you made and re-enter it. You have to answer several question regarding IRA balances and prior year contributions. You should pay close attention to what is being asked so you answer them correctly. Also, you need to enter your emergency expense amount on the bottom of the page that says These situations may lower your tax bill, so you may need to scroll down to see the option.
You can follow these steps to delete the Form 1099-R that you entered so you can enter a new one:
1. Choose the Tax Tools option on your left menu bar while working on your return
2. Choose Tools
3. Choose the Delete a form option under Other Helpful links
4. Find the Form 1099-R in the list and delete it
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