You had tax withheld from the distributions from the retirement account, just like when an employer withheld tax from your paychecks. When you enter it all into the software, the calculations are done to reconcile the amount of income you received and the amount of tax that was withheld. You might owe more or you might get a refund.
Your retirement plan in some cases is required to withhold from your distribution- this is indicated on your 1099-R, but the taxes and penalty are not calculated and paid until you file your tax return. You will see the withholding included on 1040 Line 25b and it is included on your final calculation.
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 can reduce any credits) 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.
It 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.
Sorry I should have clarified more. On box one my gross distribution was $3365.38. On box 4 which is labeled Federal Income Tax Witheld it shows $336.54. When I withdrew the money from the account they had an option to pay the 10% early withdrawal then with my disbursement. So shouldn’t that tax have been paid? Or am I wrong? Thank you for your help!!
Sorry I should have clarified more. On box one my gross distribution was $3365.38. On box 4 which is labeled Federal Income Tax Witheld it shows $336.54. When I withdrew the money from the account they had an option to pay the 10% early withdrawal then with my disbursement. So shouldn’t that tax have been paid? Or am I wrong? Thank you for your help!!
Like I said above that wasn't actually the tax. It was just an estimated withholding amount. It could be to cover anything like the tax due or the penalty.
Okay thank you, I think it’s starting to make more sense, I appreaciate your help!
Yes, most people pay tax all year round.
When you file your tax return, you are calculating if you paid enough.
Your tax return reports all the relevant tax, and all your tax payments, then subtracts those two amounts to decide if you owe a payment with your return or if you get a refund.