Force TT to remove early withdrawal tax penalty and generate 8915-E

[malligator]

Good morning, all.

I took a $9600 withdrawal from a qualified 401k last year for a Covid related lay off. TurboTax is telling me I don't have to pay the 10% penalty, but it's not actually removing it from my tax liability. Also, it's not generating an 8915-E so I can amortize the income tax over the next three years. Any idea how to get TT to get it right?

I've deleted the 1099 and reentered it answering all the questions, and, again, told I was exempt from the penalty, but my amount owed stays the same. If I check the box on the 1099 entry screen saying it's exempt it does remove the penalty so I know it can do the math. The new algorithm for handling COVID exemptions doesn't seem to work, however.

[macuser_22]

Delete the 1099-R and re-entree - say that it is COVID related.  Answer the qualifying questions  and do not check the box on the screen that asks it you want to pay all the tax in 2020.

The 1040 should have the 1099-R box 1 amount on line 5a and 1/3 or it on line 5b.

[RayW7]

Form 8915-E for Coronavirus Distributions has been released and now available in TurboTax.

First, make sure your copy of TurboTax has been updated to include all the current forms.

You can access all the information needed by revisiting your 1099-R input information. 

During the interview you will have a question 'Was this a withdrawal due to COVID-19 or a Qualified Disaster Distribution'.  Just follow the interview questions and TurboTax will automatically take care of the form 8915-E.

Be sure to answer Yes this was withdrawn do to COVID-19 and All of the distribution was a COVID-19 distribution.

Then just follow the prompts until you reach 'Does xxxxx want to pay all the tax this year.

This should resolve the issue.

The 1099 R will be entered in the Retirement Plans and Social Security section.
• Select Federal Taxes
• Select Wages and Income
• Select Show More at Retirement Plans and Social Security
• Select IRA, 401(k), Pension Plan Withdrawals (1099-R)

Note: If you qualify the 10% penalty will be removed and TurboTax will provided options for repayment.

[malligator]

I've deleted it and re-entered a half dozen times by now. It doesn't ask me if I want to pay all of it in 2020.

I answer the questions, it tells me I'm exempt, but doesn't remove the 10% from amount owed and that's it. I get no more questions or any option to amortize.

[malligator]

I answer all the questions out to the main "Wages & Income" screen. Does the question about paying all the tax this year come after that?

[macuser_22]

What version are you using - online of CD/download desktop?

What code is in box 7 on your 1099-R?

[malligator]

Looks like Mac desktop version 2020.r21.042.

Box 7 is L1. It was a loan that I couldn't pay due to the lay off so it became a distribution.

[fanfare]

That doesn't sound like  a COVID related distribution.

It sounds like a distribution related to a loan.

Drop the "L" code and see what happens.

Of course, to file that way would be a false return.

[macuser_22]

Sorry, but money taken to pay off a loan does not qualify for the CARES act treatment since *you* did not receive the money - it paid your loan.    It must be a distribution paid to you to be covered by the CARES act.

[malligator]

It didn't pay my loan. The loan is still there. The balance became a distribution.

I'm not trying to game the system. I put it in just as the 1099 is written and TT says I'm exempt from the penalty.

Either it's wrong, and there's a bug, or it's right, and there's a bug. I just want to know which it is.

[macuser_22]

---

@fanfare wrote:

That doesn't sound like  a COVID related distribution.

It sounds like a distribution related to a loan.

Drop the "L" code and see what happens.

Of course, to file that way would be a false return.

---

Filing without the L would guarantee a IRS audit and a bill for back tax plus interest and penalties

[malligator]

I've done some more digging and I found a post that, coincidentally, came from you last May.

"Code M & L are almost the same - it means that money was taken from the retirement plan to pay the loan.  Code M means that the reason was that you left employment with the company, and code L means that you defaulted on the loan but were still employed."

I was laid off from the company due to COVID so shouldn't my distribution code be M instead of L? If I change my 1099 in TT to M it does, in fact, remove the 10% penalty and allow me amortize the taxes.

[macuser_22]

---

@malligator wrote:

I've done some more digging and I found a post that, coincidentally, came from you last May.

"Code M & L are almost the same - it means that money was taken from the retirement plan to pay the loan.  Code M means that the reason was that you left employment with the company, and code L means that you defaulted on the loan but were still employed."

I was laid off from the company due to COVID so shouldn't my distribution code be M instead of L? If I change my 1099 in TT to M it does, in fact, remove the 10% penalty and allow me amortize the taxes.

---

The only difference is a code M gives you to the due date (or extended due date) of the return to roll a like amount of money from other funds to a Traditional IRA.   

Code M applies to a termination,   it is not clear if it would apply to a layoff.   If you want the code M treatment contact the plan administrator to see if it might apply and issue a corrected 1099-R.   

If you do not want to replace the money from other funds and roll to a IRA then the treatment is the same as a code L, but it might let you pay the tax over 3 years.

[macuser_22]

---

@macuser_22 wrote:

---

@malligator wrote:

I've done some more digging and I found a post that, coincidentally, came from you last May.

"Code M & L are almost the same - it means that money was taken from the retirement plan to pay the loan.  Code M means that the reason was that you left employment with the company, and code L means that you defaulted on the loan but were still employed."

I was laid off from the company due to COVID so shouldn't my distribution code be M instead of L? If I change my 1099 in TT to M it does, in fact, remove the 10% penalty and allow me amortize the taxes.

---

The only difference is a code M gives you to the due date (or extended due date) of the return to roll a like amount of money from other funds to a Traditional IRA.   

Code M applies to a termination,   it is not clear if it would apply to a layoff.   If you want the code M treatment contact the plan administrator to see if it might apply and issue a corrected 1099-R.   

If you do not want to replace the money from other funds and roll to a IRA then the treatment is the same as a code L, but it might let you pay the tax over 3 years.

---

[malligator]

Want has nothing to do with it. 🙂

Now that I'm employed again I'd like to just resume making the payments and go on with my life. However, that is not possible.

What I'd like to not do is have every possible negative consequence of the distribution levied on me due to a Covid-related lay off. Not only is my 401(k) missing the $9600, but I also have to pay income tax on it plus a 10% penalty all at a time that I'm still recovering financially from said lay off.