Excess distribution from Self 401K

[chinchu-sup]

I am self employed & contribute to a self-401K (Solo 401K).  In December 2020, I thought I had over-contributed for 2020 & requested a distribution of excess contribution of $2000. And the brokerage sent me the check & a 1099-R with Box 1 & 2a with: $2,200 ($2000 contribution + $200 earnings), with Box7=08.

Now doing my taxes, I realize that I shouldn't have requested that excess contribution withdrawal (I had forgotten about a gig I had done early in the year) and now the $2000 is showing up twice as income from both 1099-MISC & the 1099-R and I am getting taxed twice. Is there any way to reconcile/fix this so it shows up as income only one one.

Thanks!

[dmertz]

As you rightly pointed out, only $200 of this distribution is taxable, not $2,200.  You could try to get the solo 401(k) trustee to correct the Form 1099-R to show only $200 as the taxable amount, but they are unlikely to do so because they likely do not know the structure of your company whether you take a self-employed retirement contribution or are paid on a W-2 and will just keep the Form 1099-R as is by assuming that you are paid on a W-2.  This standardizes the way that they report this type of distribution.

That leaves you with two options.  You can prepare a substitute From 1099-R (Form 4852) showing only $200 in box 2a, giving you the opportunity to provide a detailed explanation as to why only $200 is taxable.  However, preparing Form 4852 will require that you paper-file.  Alternatively, you could enter negative $2,000 as an item of Other Income.  This provides little space to provide an explanation, but it allows you to e-file.

[chinchu-sup]

Thanks @dmertz. 

I had also reached the same conclusion. Some of the google searches indicate that putting a negative income raises an alert in TurboTax & it wont allow an eFile. Do you know for sure that it allows an eFile & do you have any recommendation for what description to provide with the negative 2000 income so it doesn't raise an audit risk with the IRS.

Thanks again !

[dmertz]

I don't see anything in TurboTax when I enter an item of negative other income that it prevents e-filing, but I don't know for sure.  I do know that including Form 4852 prevents e-filing.

If I needed to do this myself, I would file Form 4852 and paper-file.  This would give me plenty of space to provide explanation that only $200 of the returned contribution is taxable because the remaining $2,000 of the distribution is not deducted on this tax return as part of the self-employed retirement deduction and that it does not need to be added back to wages because the excess contribution was not the result of an elective deferral made through an employer who reported wages in box 1 of a Form W-2 reduced by the amount of the elective deferrals.  (That's bit run-on.  It could be cleaned up.)

[DawnC]

You can safely e-file your return with a negative income entry without increasing your audit risk.   If you do the negative income entry, this still allows you to e-file, so no human eyes make contact with your tax return.  Your audit risk remains the same as with any other e-filed return - LOW.   As long as you keep good records, you should not encounter any issues.   You can use whatever description makes sense to you, but you have limited space when e-filing.  You can use 'non-wage income'  'solo 401K distribution that didn't happen', etc.  

However, if you want to provide all the details (as opposed to just including the description) with the return, you would need to file the substitute 1099-R (Form 4852), which means paper-filing.   If you file by mail, expect delays as the IRS is still behind with filing paper returns, and mailed returns have to manually entered and processed.  

[chinchu-sup]

Thanks for your responses @DawnC, @dmertz. One follow-up question:

I had contributed $6000 for the tax year 2020 & before taking out the excess contribution of $2000. So when reporting the total 401K contributions for the year in Turbo Tax, do I report the total as $6000 or do I report $4000 (since the $2000 was withdrawn)

Thanks again !

[dmertz]

$4,000.  If you entered $6,000, the part that was excess wouldn't be included in the total that appears on Schedule 1 line 15 anyway.

[chinchu-sup]

@DawnC, @dmertz  - Sorry to bother you guys again.

I entered the negative income of -2,000 (with a Description) in TurboTax: Less Common Income -> Miscellaneous Income, 1099-A, 1099-C -> Other Reportable Income.  Couple of issues

1. In the Federal Review Smart Check : It reports  "Wages, Salaries & Tips worksheet: Line 9 amount should not be less than 0". Will it allow me to eFile with this warning ?
2. I just click continue and when I look at the printed 1040 with all supporting forms, I see the -2,000 reported only in the Wages, Salaries, & Tips Worksheet Line 9b. I don't see it reported anywhere else on 1040, does that sound right ?

Let me know if I did this right or if I should be reporting it differently..

Thanks !

[dmertz]

Enter the negative $2000 as Other reportable income, not as Other income not already reported on a From W-2 or Form 1099-R.