why isnt the software competing a form 5329 and stating I did not have any early retiement withdrawals after I completed the 1099 R summary (box 7 has code 1) I was 54

[avin14]

I did not claim any exemptions. I should be paying taxes and a penalty, but the software is refunding my federal taxes withheld which is incorrect

[TomK2023 · Accepted solution]

If the program is not generating Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) even though you are only 54-years-old and you entered a 1099-R with Code 1 (Early Distribution), there may be a data error in your residency/birthdate fields.
 

There are a number of areas that you can check for any erroneous errors.

1.  Check to make sure that your birth year was entered correctly in the Personal Info section (if incorrect, the program may think you are 59½ or older, ignore the "Code 1" and treat it as a normal distribution).
 

2.   Per IRS rules, if you owe the 10% penalty on the entire amount and have no exceptions, the program may not generate Form 5329 (it may just list your tax directly on Schedule 2.

1. Open or continue your return.
2. Click on Tax Tools, then Click on Tools, and finally Click on View Tax Summary.
3. Look for "Preview my 1040" and find Schedule 2.
4. Check if Line 8 shows an amount equal to 10% of your withdrawal.

3.  Make sure that the checkbox labeled "IRA/SEP/SIMPLE" on your 1099-R is checked/unchecked correctly.  The program will ask you IRA questions if it IS checked. The program will ask you Qualified Plan (401k/403b) questions if it is NOT checked.  The software might be applying an automatic "Rule of 55" exception (which applies to 401ks if you left your job at age 55, but not IRAs).

4.  Make sure that you didn't accidentally click "Yes" to a question about Qualified Disaster Distributions,Public Safety Officers, or Medical Expenses; if you did, the program will waive the penalty.  Click Edit/Add next to your 1099-R and proceed through every screen until the end of that section to ensure no "penalty exceptions" are selected.

5.  And finally, if there is an amount in Box 4 of your 1099-R, that tax is treated like a "payment" you already made. (and depending on your tax bracket, that amount may result in a refund).

For example: You withdrew $10,000. $2,000 was withheld (20%).

Penalty (10%) = $1,000.

Income Tax (e.g., 10% bracket) = $1,000.

Total Tax = $2,000.

If your other deductions (e.g., Standard Deduction) wipe out your income tax, you might still get part of that $2,000 back.