Q. Where to we flag the grandparent's tax return to waive the 10% penalty?
A. The grandparent (GP) enters the 1099-Q on their return (assuming he/she was the recipient [it was in their name and SS#]). The interview actually goes much smoother than if the student has to enter it.
Enter the 1099-Q. When asked who the student is answer: someone else not listed here. Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Also enter the amount of the scholarship in the box "Tax-free assistance". This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later.
