The split of taxation of the Covid- related distribution over 3 years is dealt with on form 8915-E.
At this point in time the Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments (Use for Coronavirus-Related Distributions)) is not finalized. We currently do not have an estimated date when the form is ready.
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I've gone through and input my 1099 from my COVID 401 withdrawal. I told the software to spread the taxable amount over the 3 years. When I do this, it doesn't add 1/3 of the withdrawal to my income, rather TurboTax reduces my taxable income for this year by 2/3 the amount of my COVID withdrawal. Shouldn't it add the 1/3 to my taxable income resulting in additional taxes? As of now, it has resulted in a return which doesn't seem correct.
TurboTax is correct. The 8915-E will be used for penalty relief from early retirement plan distributions and include the option to spread the distribution income over 3 years. You will report 1/3 of the income in 2020 then increase your income by 1/3 in 2021 and 1/3 in 2022. My guess is your plan administrator withheld 20% federal taxes and an amount for state also. That being said, you do have a larger refund for 2020. To help with the 2021 and 2022 income increases you are going to see, I would recommend apply a portion of that refund to estimated tax for 2021. That way the tax withheld on the full amount, a portion would be applied to the future years. An easy way would be to take the amount of federal taxes from the 1099 apply 2/3 to 2021 estimated tax.
You also have the option to repay all or a portion of the distribution amount over the next 2 years which will decrease the taxable amount in 2021 and 2022. You are going to have a big stimulus check coming.....
After you have logged in and are in your return:
- Go to Search at the top of the screen.
- Enter "apply federal refund to next year" in the search box.
- You will see a Jump To function that will take you to screen to apply your refund