CARES Act Disbursement double tax

[no1nate]

My 1099-R for a COVID-19 related disbursement shows how I had 10% deducted for Federal taxes and some deducted also for state taxes. Now, when entering the form into TurboTax, I am again having to pay taxes. What the heck is going on? Was the 10% not enough taxes withheld somehow? Now that the 2020 Form 8915-E is finally showing up in the online calculations, it is finally not reflecting that I should also pay the 10% penalty, so what is this extra tax for? 

[DMarkM1 · Accepted solution]

You are correct.  The withholding of 10% is probably not enough.  You income probably has you in a tax bracket that is above 10%.  You should have the option to split the distribution amount and thus taxes over tax years 2020, 2021 and 2022.  Any withholding amounts however are only credited to tax year 2020.  

            SINGLE                                      JOINT

12%  $9,876 to $40,125                    $19,751 to $80,250

22%  $40,126 to $85,525                  $80,251 to $171,050

24%  $85,526 to $163,300                $171,051 to $326,600

32%  $163,301 to $207,350              $326,601 to $414,700

The same would be true for the state taxes depending on their rates and brackets.

[no1nate]

Thank you so much for explaining that. That chart really helps explain how the withholding of 10% at the time it was paid was inadequate to pay the actual tax amount for the distribution. I hate paying taxes on receiving my own money, but that's a different discussion. 😄

[phildonnia]

The 10% was most likely not enough.   

Any taxable distribution from a pre-tax IRA will appear on Form 1040, Line 4b, (where it will increase your tax due)

The 10% that was withheld should appear on Form 1040, Line 25, (where it will reduce your tax due).  

Once all the math is done, you end up actually paying the correct amount of tax.

Please note that the CARES act allows you to avoid the penalty for unqualified early withdrawal; not the tax itself.  Many people are confused on this point.