1040 discrepancy between line 5a and 5b

[dabfvnc1]

I have received a potential proposed payment due letter from the IRS because my line 5a is greater than 5b. We did take a distribution where a portion was used to pay for hurricane damages, and opted for the three year repayment plan, but the amounts don't add up to the difference they are quoting.

Any help with this is greatly appreciate - thanks!

David B.

[fanfare]

2020 is the only year you could divide a distribution by 3.0.

This is not a repayment plan.

It is a "spread the tax" over three years plan.

You had to file form 8915-E in 2020 and 8915-F in 2021,2022 and do it correctly.

Which year is IRS complaining about?

(only for 2020 would 5a be more than 5b.)

@dabfvnc1 

[dabfvnc1]

Thanks for the reply - it was for 2021. I don't know how the value is calculated but I did enter everything include the federal and state tax deductions that were already included. 

[dabfvnc1]

There was also a distribution change that allowed funds used for recovery from a hurricane to take the three year option.

[dabfvnc1]

I also did file the 8915-F for 2021. I didn't enter these manually but use the worksheets for everything.

[fanfare]

If you took the three year option and

• did not pay any amount back into your tax deferred account,
• did not take out more than $100,000,
• did not have an IRA with a basis,

your 5b should be one third of your 5a

@dabfvnc1 

[fanfare]

By the way, I found that TurboTax Online for 2020 and other tax software did not calculate the taxable amount correctly if the bullet items above applied.

I don't know if that was fixed in TurboTax for 2021.

@dabfvnc1 

[dabfvnc1]

Here's the numbers - 5A is 190023, 5B is 174090. 38,900 was the set aside value for conducting one repair (not all) that remained to be completed. That's what we entered into the loss. So we should have had 12967 each year that was subject to tax, and the total tax amount should have been 8000 per year, per our worksheets. I'm not sure why the difference was 17, 974 between the two, but that's what the IRS says we did not report. We did in the worksheet, so I'm not sure where the number came from.

[dabfvnc1]

Good point on the version, but I also own a business so we were using the Home/BIz desktop version, and kept it updated.

[dabfvnc1]

As an FYI we did find the cause. We had a similar withdrawal addressed on our 2020 taxes for a smaller amount to address initial damage and repairs due to the hurricane, and made a second withdrawal in 2021. The worksheet did correctly subtract the 1/3 amounts for each year and then add the two totals back for the 5b amount, which should have been less. Unless there is a rule or guidance from the IRS that only allows one withdrawal per storm (which I could not find), then I believe this is correct. I'm still waiting on a response from Turbotax to confirm this.

Thanks for the assistance!

[fanfare]

I don't understand how the amount spent on repairs can impact the amoount reported on 1040 Line 5b.

Maybe you can explain what you did there.

@dabfvnc1 

[dabfvnc1]

8915 allows taxable income taking from a retirement account on a 1099-R to be spread over three years on two exceptions - for COVID and for FEMA natural disasters:

https://www.irs.gov/instructions/i8915f#:~:text=As%20a%20result%20of%20section,Disaster%20Distributi...

The E and F versions both included this variance - while you're still obligated to pay taxes on the full withdrawal (and penalties if taken before 59 1/2), the taxable amount gets spread over three sequential years.

The loss has to be reported on the 4864 form - the guidance for these is listed here: 

https://www.irs.gov/forms-pubs/about-publication-547

[fanfare]

$100,000 is the max amount to be spread.

Therefor, 90,023 + 33,333 = 123,356

Assuming no IRA basis, your Line 5b should be $123,356

@dabfvnc1 

[fanfare]

Sorry Line 5 is for pensions, not IRAs,

The calculation still holds.

@dabfvnc1 

[dabfvnc1]

It can apply to both pension and 401(k) retirement withdrawals. IRA/SEP plans are managed differently. That's how the worksheets in Turbotax are handling it.