I took a $9776 early withdrawal out of my retirement IRA. Knowing that I would have to pay taxes and penalties I withheld 35% of that 25% tax + 10% for early withdrawal.

[kevmoral]

I input all of that info into TurboTax and now it is telling me that I owe an extra 10% of $978? That means I paid a total of 45% on taxes and penalties, that seems way too high. Will the government catch this error and give me my 978$ extra back?

[VolvoGirl]

The withholding in box 4 should be included in the amount on 1040 line 64 with all the withholding from your W2s etc.  Doesn't line 64 have it added in?  Did you enter the 1099R right?

I'm sure you already know this but just to explain it a little more:

You didn't actually pay the tax or 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 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 64 (2013 line 62) or 1040A line 36.   The 10% penalty is on 1040 line 59 (2013 line 58). 

So when you add all your income for year you didn't have enough withholding taken out of the 1099Rs to cover the total tax. You owe more than they sent in for taxes.  That's very common to owe more because the withdrawals increase your income and put you into a higher tax bracket.

And by increasing your income it would have changed other items on your return like make more of your SS taxable or changed the limits on your Medical deductions or employee job expenses and changed any credits you qualified for.

Ps…..you can lose up to 50% of your withdrawal to federal and state taxes and penalties.  

[PHowell0452]

Yes, Line 64 on my 1040 does show the sum of the Withholding from Box 2 of my W-2 and my 1099. Thank you the added assurances of proper taxation. I must say I wasn't surprised that I owed more, just wanted more confidence there wasn't a formula bug in the 2014 TurboTax.

[mathteachingmom]

It's just the way that it is accounted within the 1040 tax form. Remember that this tax penalty is a separate calculation and shown on the return on a different line than the taxes calculated on the return and included in the taxes due on income line (tax liability). You can think of it this way: The 25% regular tax part is calculated as a part of the regular taxes due line on the 1040 form and the 10% early distribution penalty is shown on the other line as the tax penalty. Your total withholding that you entered into the tax return that is only shown as a total amount on the 1040 form return includes the amounts that help cover both of those instead of separating it into sections.

[PHowell0452]

I do not buy that.  There is a separate section in TurboTax I know to show the regular 1040 taxes, and where you input the taxes and withdrawal, however, when you get to the final review pages in Turbo, it does not show the extra tax as a part of this total credit.  The credit only shows the actual REGULAR taxes taken from my W-4.  This appears to be a Formula issue in TurboTax.  Can't someone verify the formula as the extra tax I had taken out also does not show on my total credits. Lastly, if the Early Withdrawal is shown in the total Income on the final review page, why isn't the Total taxes/credits shown to include the extra taxes withdrawn?

[VolvoGirl]

I posted an answer below for you.  And even though you took out extra to cover the 10% penalty It has to break out and list the 10% early withdrawal penalty separately on your return.  The extra 10% is just included in all the withholding in box 4 on the 1099R.  You won't see the taxes withheld separately.

[TomYoung]

"I input all of that info into TurboTax and now it is telling me that I owe an extra 10% of $978? That means I paid a total of 45% on taxes and penalties, that seems way too high."

TurboTax is only looking at the distribution amount and your age when it makes that statement.  Basically it's telling you something your already know: take a distribution early and you get charged an extra 10%.  It would make that same exact statement if you had nothing withheld of if you had 100% of the distribution withheld. 

[fanfare]

It's not unusual to lose 40% or more of an early distribution after state taxes kick in.