IRS "Instructions for Forms 1099-R and 5498 (2017)" page 15, indicate that code 1 should be the distribution code in BOX 7 of form 1099-R if the first time home buyer exception applies; however in TurboTax, if I enter distribution code 1, it applies the additional tax penalty. I think the TurboTax program may have an issue here. Can someone help?
Code 1 means that the payer does not know if you qualify for any exceptions to the penalty. It does not mean that you cannot have an exception.
The first-home exception only applies to distributions from an IRA. Make sure that the IRA/SEP/SIMPLE box on TurboTax's 1099-R form matches that of the Form 1099-R provided by the payer. (If the payer's Form 1099-R does not have the IRA/SEP/SIMPLE box marked, your distribution is not from an IRA and therefore does not qualify for the first-home exception) If your distribution is from traditional IRA, make sure to click the Continue button on the Your 1099-R Entries page and proceed through the general IRA follow-up questions. On the Did you use your IRA to pay any of these expenses page, enter the amount applied to your first-home purchase, up to $10,000.