@taw2 For your 529 plan distribution: You enter the 1099-Q first. Later you enter the 1098-T with the same amount (as box 1 of the 1099-Q) in boxes 1 & 5 at the 1098-T screen. Don't enter any other numbers. If you encounter a screen called "Amount used to calculate education deduction or credit", be sure the amount in that box is 0.
That will make the amount in box 2 (earnings) of the 1099-Q taxable and TurboTax will generate form 5329 to claim the scholarship penalty exception.
If you run into a problem, delete the 1099-Q and 1098-T and try this workaround in TurboTax:
Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter tuition. 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. TT will prepare form 5329 to claim the penalty exception.
