Q. How do I enter the distribution paid to me (parent) in turbo tax to avoid the penalty being applied?
A. It's best to use a short cut workaround.
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 expenses ($23K). Do not enter the expenses covered by his 529 distribution ($45K). Press Done at the 1099-Q summary screen, to get there. Also enter the amount of the scholarship in the box "Tax-free assistance" (also $23K). 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.
*Note that the $23K distribution (box 1 of the 1099-Q) is not the taxable amount. Box 2 (earnings) of the 1099-Q is the taxable amount.
