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Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

It is asking me to if I want to pay all the tax this year when I already paid tax when the money was withdrawn. Should I simply not check the box of "Pay tax on entire retirement distribution in 2020"?
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8 Replies

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

You didn't actually pay the tax. You had taxes withheld like from your paycheck. You still have to enter the whole 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 withholding will show up on 1040 line 25b.

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

So I wanted 20k in my hands. I have Fidelity through work and they asked me if I wanted to pay the tax all at once or split it for 3 years. I chose to pay it at once so they took out about 26k, 6k for tax and 20k to my hands. I put all the numbers correctly for two 1099-R forms. Are you saying I still have to pay 7k which is 1/3 of the amount I took out???

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

No.  But you have to report the full 26,000 you took out (including for taxes) and add it to your other income to figure the tax on all your income.  Then you get credit for the 6,000 withholding on 1040 line 25b.   

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

Maybe @dmertz can explain it better

dmertz
Level 15

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

You had Fidelity make a distribution of $26,000, so that's the amount that determines that amount that is included in taxable income on your tax return. If it's a coronavirus-related distribution, you have the option to include 1/3 of this $26,000 ($8,666.67) on your 2020 tax return, 1/3 on your 2021 tax return and 1/3 on your 2022 tax return, otherwise the entire $26,000 is included in income on your 2020 tax return. The fact that $6,000 was withheld for taxes doesn't change that.  Whatever was withheld for taxes is credited Form 1040 line 25b to reduce your balance due or increase your refund.

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

Sorry guys I am so confused by this... I put two 1099-R forms(since I have Roth and traditional) with correct numbers. From my Fidelity account, I can see that $6,288.17 was withdrawn separately for tax. After I put all the info in here, it is asking me if I want to pay all the tax this year and it says I reported $21,668 which is the amount I got in my hands. So, do I just not check the box and fill out 8915-E since it is Cares Act distribution? You guys were saying that 6K was withheld from my account, so I would get that back if I choose to pay tax through this year's tax return? 

 

I appreciate you guys answering all the questions btw. Please explain it like I am a 5 year old lol

dmertz
Level 15

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

It's not clear why the account statement lists the tax withholding as a separate amount, but it really doesn't matter.  What matters is what's on the Forms 1099-R since whatever was withheld for taxes is part of the entire gross amount of the distributions.  It's likely that some or all of the distribution from the Roth IRA was nontaxable, so that might explain distributions totaling something close to $28,000 but only $21,668 being taxable.  Perhaps the tax withholding was taken from the Roth account explaining why the nontaxable amount could be equal to the amount withheld for taxes.

 

You get the tax withholding back by it being credited on line 25b of Form 1040, placed there by TurboTax as a result of this amount being entered in box 4 of the Form 1099-R that included the tax withholding.  By being credited on your tax return, the money is either paid back to you as part of your tax refund or it reduces the the additional amount that you would otherwise have to pay as part of your balance due.

 

Think of tax withholding as being roughly the same as if the entire amount was paid to you and then you sent an amount equal to what was reported as tax withholding to the IRS.  If you send too much, you get a refund.  If you send too little, you have to send more later as your the balance due.

Do I still have to pay tax on 1/3 of covid distribution from 401K even though I already paid tax on withdrawal? No loan, withdrawal one time, already paid tax at once.

Thank you so much! I think I got through filing this... Still a bit confused but your explanation makes sense. Appreciate you!

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