Had a COVID 401 w/d for $75,000. Withheld $7,500 in fed taxes. Shows I owe $10K. If split over 3 years, I'm now getting a refund of $1,100? Can someone please explain?

[maxie911]

Shouldn't have to pay $3,300 this year, then again over the next two years?

[AnnetteB6]

If you qualify and choose to use the provision that allows you to use the three year period to report the Covid-19 related distribution, you are spreading out the taxable income from the distribution over three years, not spreading out the tax over three years.  

For your example of taking a $75,000 distribution, you can include the $75,000 as income on your 2020 tax return and take advantage of the tax withholdings to help offset the additional income tax due to the distribution. 

Or, if you choose to use three years to report it, $25,000 of income will be reported on each return for 2020, 2021, and 2022.  Choosing to report it this way may impact your 2021 and 2022 returns more than you realize because the taxes that were withheld from the distribution will not be used to offset the additional income.  They are only taken into account on the 2020 tax return.

[SteamTrain]

The taxes withheld get applied all to this year. So you will have to make up for that separately the next two years.

Ignoring the before numbers.....a 1,100 refund means 7500 - 1100 = 6400 assessed against 25,000.

6400 / 25000 = .256 or ~25%   (entirely reasonable.....other things can affect the exact amount)

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For the before numbers:

taxes of 10,000 + 7,500 = 17500

17500 / 75,000 = 0.233 or ~23%   ( again, entirely reasonable .....since other things can affect the exact amount )

[maxie911]

Thank you, that makes sense. Is there a way to go ahead and pay an additional amount toward the remaining $10k this year since I was already prepared to do so?

[SteamTrain]

Well...that depends on how you end up choosing to take that 75,000...........all this year, or divided up over 3 years

IF you cancel the 3-year payout  (not sure how you remove it once selected...maybe by removing the form 8915-E )....then it will just be part of what you owe this year.  But only after you've already entered everything else possible for your 2020 taxes.  Might be an underpayment penalty added in.....but that depends on a whole bunch of other things.

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IF you leave the 3-year split, then you would just use a 2021 1040-ES  estimated tax voucher to pay what you expect to owe for only the 25k assigned to next year....and then in early 2022, would use a 2022 1040-ES estimated tax voucher to pay what you expect to owe for the eventual 2022 taxes on that 25k assigned to 2022. 

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 (....or use the IRS DirectPay website to arrange a 1040-ES direct debit each year     https://www.irs.gov/payments/direct-pay            )