I withdrew from 401k due to CoVid due to reduced work hrs. I plan to pay back my withdrawal less than 3yr, so I dont have to pay tax but TboT makes me pay tax. Is this glitch?

[rpatel133]

TurboTax makes my federal tax due go up so high, even if I plan to pay within in 3 years. How can I opted out of this so it does not charge me for my taxes for withdrawal of 401k.

[macuser_22]

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@rpatel133 wrote:
TurboTax makes my federal tax due go up so high, even if I plan to pay back in 3 years. How can I opted out of this so it does not charge me for my taxes for withdrawal of 401k.

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If you elect to pay over 3 years the 1/3 of it is taxed in 2020.

[rpatel133]

Sorry, I meant I plan to pay it within 3 years. 

[macuser_22]

You can repay anytime you want, but the tax for 2020 will be 1/3 (or 100%) of the total depending if you elected to pay all the tax in  2020 or spread it over 3 years.

[rpatel133]

I had the impression you can repay the amount you withdrew with no tax penalty as long as you return all of it within 3 years. That’s what all these 401k websites say for Covid hardship. 

[fanfare]

that is true but you must amend to get back the tax that you  paid in 2020 and possibly 2021 due to not paying it back yet..

[fanfare]

if the tax is too high you must pay back some , up to one third, before the due date of your 2020 return including extensions.

[macuser_22]

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@rpatel133 wrote:

I had the impression you can repay the amount you withdrew with no tax penalty as long as you return all of it within 3 years. That’s what all these 401k websites say for Covid hardship. 

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The "penalty" is not the tax.    If a COVID related distribution  then the additional 10% penalty for being under age 59 1/2 does not apply but the distribution  is still taxed as ordinary income but that tax can be spread over 3 years.

If you return it then it is not taxed.    The interview asks for how much was returned in 2020 and subtracts that from the taxable amount for 2020 - if 1/3 was paid back in  2020 then there is no 2020 tax.

[fanfare]

@macuser_22 

 I think that's what I said.

Turbotax Online calculates the taxable amount for a COVID distribution incorrectly if 

the distribution is over $100,000 whether you do or do not pay some back.

You can try it yourself.

[dmertz]

Until you pay it back, the income in includible on your 2020, 2021 and 2022 tax returns and will be taxed.  IF you pay 1/3 back before the filing deadline including extensions, of your 2020 tax return, you will owe no tax on this money for 2020 but you'll still be obligated to report 1/3 on your 2021 tax return and 1/3 on your 2022 tax returns unless you pay those portions back before the due dates of those tax returns.

If you wait until 2023 (but still less than 3 years after the distribution) to make the repayment of the entire amount, you'll need to file amended 2020, 2021 and possibly 2022 tax returns to claim a refund of the taxes paid on the repaid amount.

[rpatel133]

So  just to confirm if I pay back 1/3 of my withdrawal before April 15, 2021, I don’t have to pay any taxes for 2020? I think that will be easier than amending in the future to get my tax I paid for the 3 years. 

[macuser_22]

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@rpatel133 wrote:

So  just to confirm if I pay back 1/3 of my withdrawal before April 15, 2021, I don’t have to pay any taxes for 2020? I think that will be easier than amending in the future to get my tax I paid for the 3 years. 

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No.  If you paid back 1/3 before Dec 31, 2020 that would offset the 2020 tax.    If nothing was paid back in 2020 then 1/3 will be taxable in 2020.

The due date is irrelevant for the CARES act.

[Zan569]

How do I spread the amount over 3 years?  I entered in the 1099-R form with the full amount.  Do I reduce the amount on it by a third?  I can't find anything that explains how I split it up.  Thanks

[macuser_22]

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@Zan569 wrote:

How do I spread the amount over 3 years?  I entered in the 1099-R form with the full amount.  Do I reduce the amount on it by a third?  I can't find anything that explains how I split it up.  Thanks

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If you meet the qualifications for a COVID related distribution then answer YES to the COVID question and the remaining COVID questions.