CARES Act 1099-R Taxes withheld

[kwindell]

I withdrew from my 401k under the CARES Act as I qualified for the early withdrawal.  I had Federal and State taxes withheld, and I knew that my total tax bill would be more than what was taken out.  When I enter my 1099-R information, including that the 10% tax was withheld (as the penalty was waived) and TurboTax is still calculating that I owe the 10% tax.  Is there a fix in the works for this or do I need to file this year's taxes with a CPA?

[DavidD66]

Yes, there is a fix in the works.  To claim an exemption from the 10% penalty for COVID-19 related early withdrawal from a retirement plan, you will have to file Form 8915-E.  This form has not been finalized by the IRS.  Click on the following link to sign up to be notified when the Form is ready:

Why am I getting getting a 10% penalty on my 1099-R when I withdrew fund during Covid? (Form 8915-E)

[kwindell]

Thank you! Per the IRS guidance, I can choose to spread my withdrawal amount over three years, but my 1099-R not TurboTax allowed for that option. Am I correct in interpreting that guidance that splitting the withdrawal evenly and including it on related tax years is a responsibility I can take? My concern is being able to support the difference amount listed on my taxes compared to my 1099-R, should I be audited. 

[SamS1]

No, TurboTax will take care of that.  The form to defer the income and penalty exclusion is not ready in TurboTax yet.  The form 8915-E will be used for penalty relief from early retirement plan distributions and include the option to spread the distribution income over 3 years.  This may be a good option is the distribution is pushing you into a higher marginal tax bracket.  You may end up paying less tax if you spread the distribution over the 3 years.  

At this point and time the Form 8915-E Qualified 2020 Disaster Retirement Plan Distributions and Repayments is not finalized. We currently do not have an estimated date when the form is ready.

Please sign-up here and we will email you once the form is live.

The pandemic has affected your taxes in many ways. Including reporting in TurboTax the amount of stimulus money you received. Click Here for more information on how the Pandemic affected your 2020  taxes.

[Mohit]

@SamS1  @DavidD66 

If we divide the withdrawal amount into 3 years.

How will california tax be calculated on that? Will it be on the whole amount of withdrawal or only 1/3 i'm including this year?

Can we declare 2/3 of withdrawal this year, instead of 1/3?

[SamS1]

Yes,  The IRS never complains about taking your tax money. If you only want to defer 1/3 and pay the tax this year on 2/3, that would be acceptable,  Depending on your tax situation, you want to make sure the other 1/3 you want to include this year is not pushing you into a higher bracket.  Whereby, if you split the distribution into 3 years and stayed in a lower bracket each year, your total amount of tax on the distribution would be lower versus paying more tax in 2020 due to being pushed into a higher marginal tax rate by the other 1/3 distribution.  Once the form is active you, can try it both ways in TurboTax then look at your marginal tax rate and see if it goes up when including the other 1/3 this year.  

Form 8915-E: Qualified 2020 Disaster Retirement Plan Distributions and Repayments, which is used for COVID-related early distributions, will be e-fileable starting 2/24.  The IRS is updating form 5329’s instructions to make it clear that COVID related exceptions cannot use 5329 and should use the new 8915-E.

From what I have found, California is coupling with the retirement provisions of the Cares Act.