The best option would be to take the excess contribution out including any income it earned.
You tell TurboTax that the excess has been removed so a penalty is not applied and the excess does not carry forward. You would enter $7000 as the total amount of your contribution. As you proceed with the entry, Turbo Tax will indicate that you have an excess contribution of $1000 plus and will ask you if you plan on withdrawing this before the due date of your return.(April 15)
Since you have already withdrawn the excess contribution, you will say "yes". The penalty will not be applied based on this answer..
The IRS lets you pull out excess IRA contributions without penalty as long as you do it before the tax filing deadline. For contributions made in the current tax year, you have until the April tax filing deadline to take the money back out. If you normally file an extension, you have until the extension deadline to take back your extra money.
When you’re pulling out contributions, you’ll also have to take out any earnings the money generated while it was in the IRA. The earnings then have to be included on your tax return as ordinary income. Aside from paying taxes on the money, you’ll also have to pay a 10% early withdrawal penalty if you’re below the age of 59 1/2.
