The following website has more detailed information concerning this exclusion.
If you are using TaxCut software to file your income tax return, follow these steps once you have finished entering all of your 1099-R's:
On the Menu bar at the top of the screen, click Forms / Open Forms.
In forms Central, click Form 1040-U.S. Individual Income Tax or Form 1040A (whichever you're using)
Scroll down to the pension distributions line (line 16b on Form 1040 / line 12b on Form 1040A)
Using TaxCut's override function, reduce the amount shown on line 16b on Form 1040 (Line 12b on Form 1040A) by the amount you are excluding.
When you print your return, enter PSO next to line 16b on Form 1040 (Line 12b on Form 1040A)
You will NOT be able to e-file your return if you claim this exclusion.
The exclusion will save most filers several hundreds of dollars in federal income tax, so for me, it is worth filing by mail, something I have not done for years. I am willing to wait longer for my return to be processed manually, so that I can receive the extra $300+ that will be in my refund due to this income exclusion.