Thank you for this response. I had the same situation as the original poster. This made me understand it better. After entering my W-2 I was showing, for example, a return of $3000. Then I entered my 1099-R, which I had chosen to pay as much tax as possible when I did the early withdrawal. This reduced my refund, for example, by $1000. Then turbotax says they will check to see if my situation would qualify for an exemption to the tax penalty for early withdrawal. If you end up qualifying to be exempt from the penalty, turbotax will say congratulations you are exempt and you refund will increase but only so much. For example from $2,000 back to 2,500. This is somewhat deceiving since it tells you that you are exempt and your refund doesn't return to its original total before your 1099-R was entered. But after reading your answer I realize that the reason my refund didn't return to the same amount was because I still owe tax on my withdrawal amount. Unlike my W-2 where i am entitled to a refund because I over paid in income tax. Thanks again.
