Why would I owe an additional tax on my 1099R IRA account? I borrowed 27,777.78 and paid 2,777.78 already in taxes up front.

[DoninGA · Accepted solution]

The amount distributed is entered on your tax return as ordinary income and is added together with your other taxable income.  The federal tax withheld is entered on your tax return as a tax payment.  If you were under the age of 59 1/2 when you withdrew the funds there is a 10% early withdrawal penalty on the amount withdrawn.  The penalty is entered on your tax return as a tax liability.

If your total tax payments are greater than your total tax liability then you will receive a tax refund for the overpayment.

If your total tax payments are less than your total tax liability you will have taxes owed.

[VolvoGirl]

First of all you don't get a 1099R for taking a loan.   You took a withdrawal. 

You didn’t actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.

You can lose like 50% of it for federal and state taxes and the Early Withdrawal Penalty.  You have 60 to put it back to not pay tax on it.