Looking at withdraw cares act. I don’t want to go over 80k for year to hit next tax bracket, do I need to claim all withdraw this year or can I spread it out over 3 year?

[swobodaca]

I’m sitting around 72-74k come year end looking at taking out 5k so I stay under 80k for married file joint. Do I need to claim all the 5k this year or can I spread out claim over next 3 years so like 2k this year 2k next and 1 k last year.? What if taxes is taken out but in 3 years I put back in 7k do I get taxes back?? What happens if I only put back in 4K?

[Critter-3]

Yes the 2020 distribution can be EVENLY reported on the 2020, 2021 & 2022 returns.

Taxes will all belong to the 2020 return even if you choose to spread out the taxable portion ... so you would have 2 options on what to do with the refund ... either take is   or  apply it to the next tax year.  

In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions.

It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan (not including an IRA) and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

You are a qualified individual if –

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

The 10% additional tax on early distributions does not apply to any coronavirus-related distribution.

Please see the IRS website: Coronavirus-related relief for retirement plans and IRAs questions and answers for further information.

The draft Form 8915-E for reporting Coronavirus-Related Distributions is here:  https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf

The draft instructions are here:  https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

[Opus 17]

Remember that going into the next tax bracket does not subject all your income to the new bracket, only the amount by which you go into the new bracket.  I also can't tell if you are taking your deductions into account.

Assuming you take the standard deduction for MFJ of $24,800, then your income is taxed at 12% up to $104,250. 

• The first $24,800 is tax-free (the standard deduction)
• Then the next $19,750 is taxed at 10%
• Then the next $60,500 is taxed at 12%.
• Only amounts over $80250 of taxable income (which is $104,250 once you add in the standard deduction) are taxed at 22%.

So even if your taxable income after the deductions is expected to be $74,000, if you had $7,000 of income from a 401(k) withdrawal, only the last $750 would be taxed at 22%, not all your income. 

However much you withdraw you have the option of spreading it out over three years.  If you return part or all of the money within 3 years, you will either get a credit for the tax you paid, or you will file an amended return to report the return and adjust your income tax and get a refund that way.  (We don't yet know how a late return will be handled as that will depend on the 2021 tax forms which is a long way off.  Filing an amended return is the safe bet but there are other ways the credit could be handled.)