Yes, you shouldn't need to pay a 10% penalty if the beneficiary receives a tax free scholarship or assistence. You will need to pay tax on the earnings but not the 10% additional tax. Now how to workaround is the question.
If you have the software version, you can accomplish this by:
- Opening Turbo Tax
- Go to the forms mode
- Select form 5329
- Scroll down to Part 11
- Scroll to the section that says Education and Able Distributions Not Subject to Additional Tax Smart Worksheet.
- Scroll Down to Line C and enter the scholarships amounts received. This should eliminate the 10% penalty.
If you have Turbo Tax online, you will not be able to make this change. I worked in the program and could not eliminate this tax. If you have been working in the online version, you may need to switch to the software version just to make the change as I outlined above. Please read this Turbo Tax link on how to switch from the online version to the desktop version. Go here to order the download for your product if you need to do so.
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