1099-R Still showing 10% early withdraw even though it was built into the federal taxes already taken out

[Aaron Bonebright]

Hey!

I took an early withdraw from my ESOP this year and had Principal take an additional 10% to cover the early withdraw. This can be seen in the fact that the federal taxes withheld on the 1099-R is 30% of the total value instead of the standard 20%. When I upload this into Turbo Tax it is still assuming that I owe the 10% early withdraw which is incorrect. Is there anyway around this? Is there something on the 1099-R that is not filed correctly and I need to go back to Principal for?

I can provide more details if needed.

Aaron

[DoninGA]

You only had federal taxes withheld from the distribution. 

The 10% early withdrawal penalty is reported on your federal tax return Schedule 2 Line 8.  The total from Schedule 2 Line 21 flows to the Form 1040 Line 23 as a tax liability.

[Aaron Bonebright]

Would you be able to explain where to find this Schedule 2 Line 8?

I was told by Principal that they could build the 10% early withdraw into the Federal Taxes withheld to cover that early withdraw penalty. Otherwise they would have just taken out the the 20% per usual, so I lost an extra 10% to federal taxes and also owe another 10% for early withdraw? That seems wrong.

[DoninGA]

If your total tax payments are greater then your total tax liability you will receive a tax refund for the overpayment.

If your total tax payments are less than your total tax liability you will have taxes owed.

On your Form 1040 tax refunds will be on Line 34.  Taxes owed will be on Line 37.  How each is calculated will be on the description for each Line.

You can view your Form 1040 plus Schedules 1, 2 and 3 at any time using the online editions. Click on Tax Tools on the left side of the online program screen. Click on Tools. Click on View Tax Summary. Click on Preview my 1040 on the left side of the screen.

[SteamTrain]

i.e.  the taxes you prepaid should be entered in box 4 of the software's 1099-R form.

Thus you get credit for having pre-paid them that way, but the 10% penalty is still a part of the total tax calculations in your tax return, to thus create a total tax liability, against which, all your tax pre-payments (withholding , plus any separate quarterly estimates paid) will be applied....to see if you overpaid, or underpaid...based on your ENTIRE tax situation for 2023.

[VolvoGirl · Accepted solution]

Maybe I can  say it a different way.  You are not paying an extra 10%.  It just has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.

You didn’t actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

And the 30% they took out might not be enough to cover the increase in tax on all your income.  

[Aaron Bonebright]

Ah this does help, thank you so much. Appears the biggest chunk that I would pay in is for the state which didn't have any extra taken out when the withdraw happened so that does make some sense now. Thank you so much to you and all of the responders! I think I can rest easy knowing that this amount is correct.