My hours were furloughed during 2020. I took an early distribution from my IRA. I want to avoid the 10% penalty and pay over 3 years. How can I do that here?

[ColeenD3]

Form 8915 -E is not yet finalized by the IRS. 

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

• You, your spouse, or your dependent are diagnosed with COVID-19
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had work hours reduced to COVID-19
• You’re unable to work due to child care closure or hour reduction

The distribution would be taxed over 2020, 2021, and 2022. You’ll have that time to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions, and if you pay back the amount within that time, you’ll be able to claim a refund on those taxes.

[ColeenD3]

To enter your 1099-R:

You'll get a 1099-R if you received $10 or more from a retirement plan. Here's how to enter your 1099-R in TurboTax:

1. Open (continue) return if you don't already have it open.
2. Inside TurboTax, search for 1099-R and select the Jump to link in the search results.
3. Answer Yes on the Your 1099-R screen, then select Continue.
   • If you land on the Your 1099-R Entries screen instead, select Add Another 1099-R.
4. Select how you want to enter your 1099-R (import or type it in yourself) and then follow the instructions. You can add up to 20 1099-Rs.

[eratikryan]

Thank you for the thoughtful reply!  I do have a couple of additional questions.  I want to ensure that I understand and be clear on mechanically how to enter this in TurboTax.  I assume most people would prefer to pay our IRA back rather than pay our tax liability so keep that in mind on my questions below.

1. I assume I will need to pay my 1/3 tax liability each year, even if I plan to pay back my IRA within 3 years?
   1. I.E. There is no way to make a partial re-payment to my IRA and avoid the tax liability each year?
   2. It sounds like in order to get that back from the IRS I would have to pay over 3 years and then prove that I re-payed my IRA on the 3rd year to take that as a refund?
      
      
2. Mechanically (in TurboTax):  How would I pay only the third of my tax liability this year vs the entire thing?
   
   1. You mentioned 8915-E being finalized.  Will that show up in TurboTax and become the way we should handle this moving forward?
      
3. Mechanically (in TurboTax):  What do I enter to avoid the 10% penalty when I add my 1099-r?
   1. Currently just to get an idea of my liability I added it as normal, ticked the covid19 exception, and then entered the full amount in the "other" reason where it asked what I used the funds to pay for.  This did remove the 10% penalty but I suspect this is NOT the correct thing to do when I actually file?

Thanks again, I really appreciate the guidance!

[DanaB27]

Question 1:

Yes, you will pay 1/3 of the tax liability each year, even if you plan to pay back your IRA within 3 years. But when you pay back the amount within that time, you’ll be able to claim a refund on those taxes paid when you file the amended tax returns for those years.

From the IRS:

"If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022."

Question 2 and 3:

TurboTax will update this section after the IRS releases the final version of Form 8915-E, then you can finish your distribution information and TurboTax will calculate the tax due and exempt you from paying the penalty. 

Once the Form 8915-E is ready please follow these steps to enter your 1099-R:

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” and you should see the “Your 1099-R Entries” screen
4. Click "edit" and continue until "Tell us if any of these uncommon situations apply" screen
5. Select "I took out this money because of a qualified disaster (includes COVID-19)" (TurboTax will walk you through questions once this section is ready)

[KapiL]

Thank you @DanaB27. Really appreciate the full response. I did not realize that form 8915-E is not ready yet, so was a bot concerned that TurboTax was still indicating I had a 10% penalty.

The re-payment info you provided is super valuable.

[KapiL]

@DanaB27 One further question. Will the early IRA withdrawal and income recognition over 3 years also apply to my NY State taxable income. I believe the answer is yes since the state taxable income is closely tied to federal income. But, appreciate it if you can provide some confirmation.

[DanaB27]

Yes, New York State will follow the federal treatment of the IRA withdrawals. The income will be included in New York adjusted gross income in the same year it is included in federal adjusted gross income. Therefore, if it is spread out on your federal return for three years then it will be also spread out on your NY State return.

Please see New York State tax implications of the federal CARES Act for additional information.