Effect of IRA distribution

[Toksica]

I started doing my taxes recently and after entering my W2 and other things, Turbo tax said I had about $7008 refund coming to me. Then I Entered a 1099-R for a $27,000 IRA disbursement and I was shocked to see Turbo tax say I now owe about $2466. I had not paid taxes on the $27K IRA when I withdrew it, but I didn't think the effect will be about a $9000 swing. Can somebody help me understand how this $27K IRA distribution could have such devastating effect. Turbo Tax said it will only recognize $2700 in taxes I didn't pay but I didn't expect the effect to be $9K. I need advice on this. Thanks.

[SweetieJean]

Whenever you add income of any type, some deductions/credits can also go down or even be eliminated.  You might also be subject to an underpayment of estimated tax penalty, since you didn't have anything  withheld.

If the distribution was COVID-related, be aware that the form for handling this isn't finalized yet.

[jholsapple]

@SweetieJean, do you know if there is an ETA for this update, as you stated there should be no 10% penalty on a COVID withdrawal, and yet I am getting the same result, and it says to "re-visit this section later".

[SweetieJean]

No ETA, as the IRS itself has not yet finalized the form.  Once it does, it then has to approve TT's version (programming) of it.  Probably not until at least February.

[Toksica]

You are awesome. Thanks for answering the question. If you think IRS will decide soon and Turbotax will implement by February, do you know how Turbotax might inform their customers

[CatinaT1]

You will report this on a Form 8915-E.  The IRS has not yet finalized the Form 8915-E for retirement plan distributions under the CARES act.  So this form cannot be included in the TurboTax program.  You will not be able to proceed until the form is available.

The IRS has not communicated when the form will be finalized for inclusion on the 2020 federal tax return.

We estimate it will be sometime in February 2021 before the form is available.  You can watch this link for the form availability.  Currently, the form is not listed here since there is no estimated date.  Once there is, you will find the form listed with the date available.  

IRS forms availability table for TurboTax individual (personal) tax products

Additionally, the IRS will not start processing returns until February 12, so waiting for this form is not slowing down the processing of your return.

[Toksica]

Do you know if this updated form 8915-E you talked about is now available for use in Turbotax

[DoninGA]

---

@Toksica wrote:

Do you know if this updated form 8915-E you talked about is now available for use in Turbotax

---

Form 8915-E is scheduled to be available in TurboTax on 02/24/2021

[Toksica]

Do you know if this updated form is now available?

[DianeW777]

It is being prepared for release. Form 8915-E: Qualified 2020 Disaster Retirement Plan Distributions and Repayments, which is used for COVID-related early distributions, will be ready for e-file starting February 24th.  It was recently moved out of the draft form by the IRS.

• For more information about this form use this link: Qualified 2020 Retirement Distributions due to COVID

• Sign up for email notification for Form 8915-E as soon as it's available by clicking this link.

[jholsapple]

So, will it not be integrated into the online filing software? We fill it out and attach it?

[Toksica]

The reply from the Turbo tax person said the below. It said it wilkl be incorporated into the software for e-filing. Which means they will send an online update to your copy of Turbotax so you can use the updated form.

It is being prepared for release. Form 8915-E: Qualified 2020 Disaster Retirement Plan Distributions and Repayments, which is used for COVID-related early distributions, will be ready for e-file starting February 24th.  It was recently moved out of the draft form by the IRS.

• For more information about this form use this link: Qualified 2020 Retirement Distributions due to COVID

• Sign up for email notification for Form 8915-E as soon as it's available by clicking this link.

[AmeliesUncle]

I just want to point out to anybody reading this thread that the law for spreading out the income and to waive the penalty are  only for QUALFIED Covid-related distributions.  This isn't a get-out-of-jail free card for everybody that withdrew from a retirement contribution, you need to QUALIFY for it.

As for the original question about why there is such a large impact on the tax return, if a person is in the 22% tax bracket and if the 10% penalty applies, that is a total of 32% (plus any state taxes and penalties.  So that easily explains $9,000 in taxes on a $27,000 retirement withdrawal.

[Toksica]

Do you know if this revamped form has a list of what QUALIFIES as Covid-related distributions. 

[SamS1]

Must be a coronavirus related retirement plan distribution made in 2020 and made to a qualified person,  The IRS defines a qualified person as:

1. You were diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (referred to collectively in these instructions as coronavirus) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act).

2. Your spouse or dependent (as defined in section 152) was diagnosed with coronavirus by a test approved by the CAUTION ! CAUTION ! Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act).

3. You experienced adverse financial consequences as a result of you, your spouse, or a member of your household (as defined next):

      • Being quarantined, being furloughed or laid off, or having work hours reduced due to coronavirus;

      • Being unable to work due to lack of childcare due to coronavirus;

      • Having to close or reduce the hours of a business you, your spouse, or a member of your household owned or operated due to coronavirus; or

      • Having a reduction in pay (or self-employment income) due to coronavirus or having a job offer rescinded or start date for a job delayed due to coronavirus.