401k Excess

[rkovelman]

Hello,

I am wrapping up my taxes for 2019 and following the directions by TurboTax to create a 1099-R with the information I have.  In box 7 I selected option 8, Return of contribution taxable in 2019.  When I look at the form when I was done I noticed under the 1099-R Additional Distribution Information A4 to NOT be checked.   Shouldn't that be checked if you select option 8 through the guided tour? Is this a bug, or am I over complicating this?

Thanks!

[macuser_22]

Was this a 2019 contribution  returned in  2019 or returned in 2020?   

If returned in 2019 then you should have received a 1099-R form the  401(k) trustee and not need to guess at it.   If returned in 2020 then code 8 would only apply to the box 2a earnings on your 2020 tax return next year.   The 2019 contribution returned in 2020 must have a code P in box 7 of a 2020 1099-R.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

Assuming a 2019 contribution returned in 2020 then:

You do not need to wait for a 1099-R next year that will probably require you to amend your 2019 tax return to report the excess on line 7 of your tax return - it can be entered this way and then ignore the 2020 1099-R with a code P in box 7 when it comes.

There are two methods to do this:
1) Enter a 1099-R with the returned contribution amount (not including earnings) in box 1 & 2a, and a code "P" in box 7. When asked what year 1099-R say 2020.

or 2)
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

[Note: If there were any earning that were returned in 2020 then the earnings will be reported on a separate 2020 1099-R with a code 8 that goes on your 2020 tax return - do not enter the earnings here.]

Both methods will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 21, and identify it as “Loss on Excess Deferral Distribution.”

Enter as:
Miscellionious Income ->
Other reportable Income ->
Any Other Taxable Income (yes) ->
Description (enter "Loss on Excess Deferral Distribution" and amount as a negative number).

[rkovelman]

I will need a moment to digest what you wrote but this was a contribution made in 2019, and then just the excess was returned in 2020, but prior to April 15th deadline. I will not be penalized for this. I know I do not pay taxes on the total amount in 2019, just the gross overages, not the earnings.  That is where my focus is, just the overages/excess contribution.

[macuser_22]

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@rkovelman wrote:

I will not be penalized for this. I know I do not pay taxes on the total amount in 2019, just the gross overages, not the earnings.  That is where my focus is, just the overages/excess contribution.

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Since the contribution was deducted from your wages, that excess, wen returned, must be added back to your taxable wages in line 1 or the 201040 form.   There is no penalty, only the taxable income.   Either method above will do that.   The Miscellionious Income method is the simplest, but there are several screens to go through to get there.