Yes, it is possible that your refund gets reduced because of the taxes due on the second third of the COVID distribution. The taxes you had withheld were all applied to your 2020 tax return. Therefore, you haven't paid any taxes in 2021 for the 2021 distribution part and this is why your refund got reduced after entering the information in the retirement section.
It also might be that you qualified for certain credits before entering the COVID distribution information but now no longer qualify because of an higher income.
Please verify that line 5b of Form 1040 has only $20,000 as taxable (assuming you didn't have any other retirement distribution in 2021).
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