Yes, you can avoid the penalty, for the reasons stated, and TurboTax handles this.
Q. How do I report it in turbo tax?
A. Very carefully. First enter the 1099-Q. Then enter his expenses & Veteran info at Education expenses. Be sure to include room and board as expenses. It may reduce the taxable portion of the 529 distribution.
In TurboTax (TT), enter at:
Federal Taxes Tab (Personal for H&B version)
Deductions & Credits
-Scroll down to:
--Education
--ESA and 529 Qualified Tuition Programs (1099-Q)
Then
In TurboTax (TT), enter at:
Federal Taxes Tab (Personal for H&B version)
Deductions & Credits
-Scroll down to:
--Education
--Education Expenses
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.
