Should excess 2020 401k deferrals be reported on substitute 1099-R in retirement section or 1099-Misc in "Other" income? I get two different answers within the TT program

[jouvelakasfamily]

The TurboTax pop up when reviewing income seems to suggest the excess deferrals should be reported in retirement income section on mock 1099-R while Q&A section suggests creating a substitute 1099-R will cause issues with IRS and instead 1099-MISC should be used. Which is correct?

[Irene2805]

IRS Pub. 525 - Taxable and Nontaxable Income states that:

If you take out the excess

• after the year of the deferral and you receive the corrective distribution by April 15 of the following year, don't include it in income again in the year you receive it.
• If you receive it later, you must include it in income in both the year of the deferral and the year you receive it (unless the excess deferral was a designated Roth contribution).

You need to report only the excess contribution, not any money generated by the investment of the excess contribution.  What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

To report receipt of the excess deferral please follow these steps:

1. Click on Federal > Wages & Income
2. In the  Less Common Income section, click the Start box next to Miscellaneous Income, 1099-A, 1099-C.
3. On the next screen, click the Start box next to Other income not already reported on a Form W-2 or Form 1099.
4. Answer the question Did you receive any other wages?  Yes
5. Click through the questions till you get to Any Other Earned Income
6. Answer Yes to Did you earn any other wages?
7. On the screen, Enter Source of Other Earned Income mark the Other radio button and click Continue
8. On the next screen, enter the amount of excess deferral with the description "2019 Excess 401K Deferrals" and click on Done.

[jouvelakasfamily]

The advice provided above aligns with direction I found in the forum for prior years. However, the deferral was for 2020, not 2019 and the instructions TurboTax provided (see below screenshot) when I entered in my W-2s which reflected the excess deferrals indicates I should enter a 1099-R hence my confusion.

[macuser_22 · Accepted solution]

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@jouvelakasfamily wrote:

The TurboTax pop up when reviewing income seems to suggest the excess deferrals should be reported in retirement income section on mock 1099-R while Q&A section suggests creating a substitute 1099-R will cause issues with IRS and instead 1099-MISC should be used. Which is correct?

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No.  A "substitute 1099-R" is only used if the real 1099-R you received is in error and the issuer refused to correct it.

There are 2 ways to report this and both are correct because they do the same thing.

You do not need to wait for a 1099-R next year that will probably require you to amend your 2020 tax return to report the excess on line 1 of your 1040 tax return - it can be entered this way and then ignore the 2021 1099-R with a code P in box 7 when it comes.

There are two methods to do this (I prefer the 2nd method because many people make errors or get confused by the 1099-R interview):

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 2021.

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 2020 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 2021 then the earnings will be reported on a separate 2021 1099-R with a code 8 that goes on your 2021 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.

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

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).

[jouvelakasfamily]

Ah, I think I got it. Just enter a 1099-R as if I had received one and mark it as for 2021 - entering it without actually having received it doesn't automatically make it a substitute 1099-R. Thank you so much for the clarification, direction and help.

[xiaolwu]

Hi Macuser_22,

I entered my excess contribution exactly as you described last year (2nd method). Now that I actually have my 1099R, do I still need to enter it or just ignore it completely? I don't want the IRS to think I still need to amend my 2019 tax when I already paid it.

Thank you

[macuser_22]

If you entered it in 2019 and it was included on line 1 of your 2019 tax return then you already reported the code P 1099-R and can ignore it.

If you also receive a 2020 1099-R with a code 8 then that mus be entered on your 2020 tax return

[TheExit55]

@macuser_22 

Question regarding the step in option 2 below in Red.   If I have already made the withdraw of the excess 2020 contribution from my individual 401K...   Can I enter the 2020 contributions to individual 401K in the "elective Deferrals" box as my Contribution less the excess withdraw I've already done?  I.e (it would equal the amount of "maximize  contribution to individual 401K).     And then  keep the amount of the excess deferral blank and add the explanation "2020 Excess 401K Deferrals" in the step below?   

And if there were any earning that were returned in 2021 then the earnings will be reported on a separate 2021 1099-R with a code 8 that goes on my 2021 tax return - I would not enter the earnings on my 2020 tax return.   Thanks for your help!

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.