Is there an error in TurboTax when calculating taxable income from a covid-19 retirement distribution?

[icky0]

I took a qualified $30,000 covid-19 distribution from my 401k. I repaid $10,000. I elected to spread the distribution over 3 years. TurboTax is still reporting $30,000 as taxable income for 2020, even though it should be $0.

[DanaB27]

Please check you Form 1040 line 5b, it should show $0 taxable.

The $30,000 split in 3 years means $10,000 is taxable each year, but your repaid $10,000 in 2020 therefore in 2020 your taxable income in regards to the distribution is $0 ($10,000 - $10,000).

Please make sure you enter the amount repaid on the "Enter repayment amount" screen.

To preview Form 1040:

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left

[icky0]

I have filled out the forms correctly but line 5b still shows the entire distribution as taxable income for 2020.

[DanaB27]

But you got a statement saying that you are eligible for the COVID exception on the "Let's check if you're exempt from additional taxes" screen and on the "Do you want to pay all the tax this year?" screen it states you have a distribution of $30,000 but only have to pay tax on 1/3 ($10,000) on this years return, minus repayments? And the box under it is not checked?

What is the code in box 7?

You might have to try to delete your form 1099-R and reenter it.

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Delete the form and add a new one.
5. Answer all questions carefully.

[icky0]

Yes, I got the statement that I'm eligible for a COVID exception.

On the next screen though it says I have a $0 distribution but only have to pay tax on 1/3, $0. The box under it is not checked.

The code in box 7 is 1. If I change it to 2, TurboTax still calculates the taxable interest incorrectly. I am fairly certain this is a TurboTax error that their engineers are going to have to address.

[DawnC]

The correct code is 1 (no known exception).   And $0 tax would be correct if you elected to spread the tax.   Once you indicate that it was covid-related, that removes the 10% early withdrawal penalty.   When you elect to spread the tax over 3 years, you are electing to pay the tax over 3 years, 10K each.  You have already paid back the 2020 portion of 10K, so no tax for 2020.  Next year (and 2022), you will owe tax on 10K of retirement income, unless you pay it back of course.    Code 2 should be used if you are under 59.5 and one of the following applies.  

• you directly converted the assets to a Roth IRA;

• the distribution was a result of an IRS levy; 

• the distribution was part of a series of substantially equal periodic payments; or

• the individual qualifies for a penalty tax exception that doesn’t require using codes 1, 3, or 4.

[icky0]

Um, no. TurboTax is still including the entire amount of the distribution as taxable income for this year. That's why I believe there is a software error since I have filled everything out correctly.

[DawnC]

Yes.  If it shows the full distribution as taxable income for this year, that is a problem.  I thought you said in your above post, that '''On the next screen though it says I have a $0 distribution but only have to pay tax on 1/3, $0. '''     What does your line 5b say now?   The summary screen is the only place you should see the full amount of the distribution, which it is fine there.  

[icky0]

I have filled out the forms correctly (including deleting 1099-R and re-entering it) but no matter what I do, line 5b still shows the entire distribution ($30,000) as taxable income for 2020. How can I report this to TurboTax as an error in their app?

[fanfare]

@DawnC 

Please provide IRS reference.

Your analysis make no sense 

If you returned 10,000 of 30,000 you have a 20,000 distribution and one third of that is

$6,667 which should be the taxable amount.

[icky0]

The instructions on form 8915-e are quite clear. If you take a distribution, elect to spread it out over 3 years, 100% of any repayment will be applied to what you owe in year 1. If the amount you repaid is more than 1/3 of the total distribution, the excess repayment counts towards year 2.

[fanfare]

@DawnC 

what is my taxable amount in this case:
I took out $162,500 and rolled over 43,000 in 2020.
by my calculation it is $52,833.
It is COVID and I am spreading that tax.

Note: that is not the number TurboTax Online calculates.
I hove no idea how they arrived at their taxable figure.

PS Don't cheat by using the program !

[DawnC]

When you get to the screen that says Let's check if you are exempt from additional taxes, do you see one question or two?   There is an issue where the second requirement question is not showing up.   That is being addressed but that may be causing your issue.   When I enter a 30K distribution and indicate that I paid back 10K, I get no taxable income on Form 1040.  

[icky0]

On the screen that says "Let's check if you're exempt from additional taxes," I see 3 questions:

Did you receive the withdrawal before December 31, 2020?

Did you, your spouse or dependents test positive for Covid-19?

Were you or anyone living in your household financially impacted by Covid-19?

After I answer all 3 questions, the screen says: "Great News! You are eligible for a Covid-19 exception..." I believe this is an exception to the 10% early withdrawal penalty.

My 1040 line 5b still says that the full $30,000 is taxable income in 2020, even though I repaid $10,000 and elected to spread the distribution out of 3 years.

[fanfare]

you don't elect to spread the distribution. that is the default.

you elect to not spread the tax.

TurboTax must think you made that election.