You're preaching to the choir. Congress just missed an opportunity to correct this unfairness with the recent changes to 529 rules.
TurboTax will not give you an option, in the interview, to waive the penalty, because of the matching year criteria.
If you intend to claim it, you'll have to use the forms mode to override it. Forms mode is not available in the online editions.
Peter J. Greco, CPA, founder and chief tax strategist at the CSI Group, believes you have more latitude when deciding when to take the scholarship distribution. “Most believe and have written that the distribution must be made in the same year that the scholarship paid for the tuition expense,” Greco says. “However, IRS 970 is silent as to when the money must be withdrawn. If Congress is trying to encourage 529 plans, then it makes good policy sense that the withdrawals can be made any time prior to graduation.” https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/
