1099-R Treatment of Federal taxes paid under CARES ACT

[SJOS]

Am I required to spread over 3 years the federal taxes already paid on a early distribution from my 401k if I choose to spread the distribution as income  over 3 years? or Can I report the full amount in the year I am filing my taxes?

Thank You

[DavidD66]

You have the option of spreading your tax out over three years, but you don't have to do so.  You can report the full amount and pay the tax in the current year if you would like.

[SJOS]

I think I know the answer but need a second opinion- I am planning to capitalized on spreading the early distribution as income over 3 yr but claiming all the taxes paid on this early distribution for 2020. For example received 45K and paid $9K on the early distribution. For 2020 filing, I will report $15K as income but for taxes paid on this distribution I will report $9K to maximize my refund  as my income bracket will slide down to a marginal rate of 9%. Is this acceptable and will the software be smart enough to take the full amount of the  $9K taxes paid for 2020 while spreading only $15K for 2020.

[DawnC · Accepted solution]

Yes, TurboTax can handle the repayments.   When Form 8915-E is ready this weekend, you will be able to opt to have the distribution taxed over 2020, 2021, and 2022.  You’ll have that time to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions, and if you pay back the amount within that time, you’ll be able to claim a refund on those taxes.  The $9K that you had withheld will be applied to your 2020 tax return, but the $45K distribution will be spread out over 3 years, and the software will work as intended once updated and Form 8915-E is included with your return.  

All COVID-19-related distributions must be treated consistently, either all reported fully in the tax year withdrawn or all reported ratably over three years.