My spouse was doing our taxes when my spouse noticed the 529 was being treated as taxable income. My spouse searched for a solution on the Turbo Tax website, and discovered this message, which I am sharing here as I imagine that many parents with 529’s for their children will encounter the same problem we did. It tells the steps you need to take to ensure that the money is not taxed by glitch:
“Turbo Tax’s Education Optimizer doesn’t support distributions from Section 529 Qualified Tuition Plans (QTP) reported on Form 1099-Q. As a result, part or all of the distribution is incorrectly treated as taxable income.
....Here’s how to work around this limitation:
1. Go back to the beginning of the Education section in the Deductions & Credits section.
2. Select Revisit next to Expenses and Scholarships (Form 1098-T).
3. On Your Education Expenses Summary screen, select Edit next to Education Information.
4. Answer the questions until you reach the screen Amount Used to Calculate Education Deduction or Credit.
5. On this screen, change the amount to $0 if you’re not eligible for any education credits. If you are eligible, subtract your 1099-Q distribution from your education expenses and enter the difference.
6. Select Continue and your program will correct the calculation.”
In step #5, my spouse put $0, and then the problem was corrected and we were not taxed for the 529 amount.