TurboTax is not failing on the handling of the 1099-Q and qualified 529 plans.
The 1099-Q provides three key pieces of information. Box 1 reports your annual distributions or withdrawals from the account. The second box reports the portion of the distribution that represents the income or earnings of your initial investment. Finally, box 3 reports your basis in the distribution. Essentially, this is the amount of your distribution that relates to the original contributions you make to the account.
What should I do with Form 1099-Q? If you used all the money you withdrew from your QTP or Coverdell ESA to pay for qualified education expenses and meet other IRS requirements, the distributions are not taxable and you do not need to report them as income. Just file your 1099-Q with your tax records.
The 1099-Q gets reported on the recipient's return. ** The recipient's name & SS# will be on the 1099-Q. Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit if the parent is claiming the student as a dependent. In order for the parent to claim the education credit, the student must be claimed as a dependent.
In addition, the 1099-Q does not have to be reported if the funds were used for qualified educational expenses. On the back of the 1099-Q it specifically states:
Instructions for Recipient Distributions from Coverdell education savings accounts (CESAs) under section 530 and qualified tuition programs (QTPs) under section 529, including rollovers, may be taxable. Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution. See Pub. 970 and the Instructions for Forms 1040 and 1040-SR for more information. Also, see Form 5329 and its separate instructions
