Due to an error in the Teachers Retirement System of Illinois this year (they phased out some program/benefit and had to refund teachers a portion of what they'd paid in for it), I received a cash payment of about $1700. When it was cashed out, I also had to pay federal income tax on it (about $350). I received a 1099-R in the mail with the information from the transaction. But when I put it into Turbo Tax, I was taxed AGAIN for the income I received, I think because it was considered an "early withdrawal" (the total refund when down another $170 when I put in the Distribution code 1). As none of this was a choice on my part, I was forced to take the money at this time, it doesn't seem fair that I'm being penalized for early withdrawal. Should I be being taxed again in this case when I already paid federal taxes?
I did put the cash towards a variable life insurance policy that I pay into after receiving it, but I'm not sure if that matters.
