This is a glitch, it isn't new, and there is no announced resolution or date. Lots of people are here advising that you should just not enter the 1099-Q, but I think that is risky. The IRS has a copy of the 1099-Q, and they have algorithms that could (probably would) detect when you don't include it.
Scenarios vary for how big of an issue this is, depending on whether the beneficiary is a dependent or not. If a 1099-Q is issued with you as the recipient, and the beneficiary is not your dependent, TurboTax (and virtually all tax software) will err on the side of caution, and charge full tax, even if all of the money was spent on qualified educational expenses. And with the current glitch in TurboTax, you may also be assessed a 10% penalty if it thinks the money wasn't spent on qualified expenses, like room and board.
The simple workaround that I use for all these issues, which, unfortunately, only works in Desktop:
- I enter the 1099-Q. TT doesn't let me enter necessary details and costs for educational expenses, so I am stuck with tax and penalty.
- Then I go to FORMS mode (button on top-right of TT screen).
- I then navigate to the 1099-Q form.
- On the top menu bar, I click edit and select "override."
- I go to line 2d on the 1099-Q form and enter the entire amount spent on qualified costs. It will be red because of the override, but it will stop reflecting tax and penalties.
- The refund amount on the top of the screen updates to reflect that I no longer am charged the tax and penalty.
Now everything balances. The 1099-Q has been entered, and I don't have to pay unnecessary taxes and penalties. This solution comes with the disclaimer that once you do an override on a form, TurboTax is no longer responsible for what was reported on the form - you are. In my case, I think that carries less risk than omitting the form and inviting the IRS into my life.
