Is it right that I'm being double taxed for my 401k withdrawal made in June 2020?

[piccolo113]

When I withdrew from my 401k in June 2020, doing so because the early withdrawal penalty was being waived and covid was affecting my employer's business and I was facing huge hour cuts and layoffs, the amount I withdrew was assessed an 18% tax. I withdrew $33,348.03 and $6,002.64 was taken off the top, leaving $27,345.39 to be deposited into my checking account. When I filed my tax return, and answering the questions about a Qualified Disaster Distribution, it was stated to me that it qualified and the early withdrawal penalty was waived, but that I owed more taxes. Not thinking to question it, I filed and chose the option to spread my tax debt over 3 years.

My problem is this: If I was taxed that 18% upon the withdrawal to begin with, why am I being taxed again upon filing?

[fanfare]

You're not double taxed.

However, you used up the $6,003 withholding on your 2020 tax return.

That's unfortunate because you still owe tax in 2021 and 2022 on the other two thirds.

If you got a big refund for 2020 and spent it, you're now stuck.

@piccolo113 

[rjs]

You didn't pay 18% tax on the withdrawal, and you're not being double taxed. The 18% was withholding. Withholding is an advance payment towards your total tax for the year. You got credit for that payment on your tax return. Your tax return calculated the total tax on all your income for the year, including your wages, the 401(k) withdrawal, and any other income you had. It also added up all your withholding for the year. You had tax withheld from your pay and from the 401(k) withdrawal. Then it applied the total withholding against your total tax. Apparently the total withholding was less than the total tax, so you had to pay the difference.

[piccolo113]

I'm confused where your assumption comes from, because my tax document from 2020 makes zero mention of the taxes taken from the withdrawal. The only thing shown on my 2020 documents is the total amount of the withdrawal and the taxable amount after being divided by 3.

There is absolutely nothing in my filing, nothing on the 8915-E, nor the questions I had answered on TurboTax that acknowledge the $6,003. The 1099-R clearly has the taxes withheld listed in their proper boxes. I entered all this information into the system when I filed (unless, of course, TurboTax didn't ask about the boxes listing the Federal Taxes Withheld and State Taxes Withheld boxes). Either way, I am being double taxed. If I am incorrect, please specify how having taxes withheld upon withdrawal and then being taxed again upon filing isn't being double taxed. I know tax code is complicated, but that seems pretty straightforward to me.

Edit: I was typing this up before I noticed your response, @rjs. I still do not understand how that is the case considering the amount is not mentioned on the filing documents. Not the $3,335 that was the Federal Withholding portion, not the $2,668 that was the State Withholding portion, and not the total $6,003 between the two.

[VolvoGirl]

You should have entered the withholding from the 1099R in boxes 4 & 17.  Didn't you get credit for  the federal withholding from box 4?  It should be on your 1040 line 25b? 

[piccolo113]

Oh...yeah, it's there. Heck, I feel incredibly stupid right now. I looked up and down through the forms and somehow missed that line every time.

Thank you, @fanfare, @rjs, and @VolvoGirl  for putting up with my obstinance. It's obvious to me, now that it has been explicitly spelled out, that my withdrawal didn't withhold enough to cover the amount I should have been taxed. 

[VolvoGirl]

Well part of the problem is you got credit for 100% of the withholding all in the first year - 2020.   But you only report 1/3 of the income each year.   So after 2020 there is no withholding to apply to the added taxable income.

[Critter-3]

What you should have done was to apply some of the 2020 refund to the 2021 return so cover the taxes on the 1/3 portion of the distribution to be reported on the 2021 & 2022 returns.  If you did not save a part of the excess refund on the 2020 return for future use then sadly you are on the hook for the taxes now.  This option to spread the 2020 distribution was unusual  and dealing with the tax consequences was not explained well by the program or the IRS for that matter.   This is where using a paid tax pro instead of a DIY program would have been helpful.  I educated my clients on their options in this matter  and guided them to make the best decision for their situation and made sure they had enough put aside so they did not get a surprise tax bill. 

[fanfare]

"What you should have done was to apply some of the 2020 refund to the 2021 return"

@Critter-3 

There was no refund. The was an "amount you owe".

[piccolo113]

No, Critter-3 was accurate in their assumption. I have two kids, so there was a refund. Applying that year's return to 2021's taxes is what I should have done. That would have left me with a better return that I could apply to this year's taxes when I do them in a few months.

Well, needless to say this whole thing has been a learning experience. I'm definitely going to be better about thinking ahead.