Your first statement is what I don't understand. When I withdrew the funds from both accounts, I had 20% in federal taxes withheld for me. The full tax is recorded on my 2020 tax return.
Correct me if I'm wrong, but what I understand is that I included the tax paid on the full withdrawal in 2020, but only 1/3rd of the income. Now I'm claiming the second third this year, but TT is not including the fact that I already had the 20% tax paid. Can someone break it down for me in the example below (using fake numbers to simplify the equation). Not worried about state taxes at this time.
401K withdrawal $100,000
Federal withheld $20,000
2020 return
Claim $33,333 as income.
Claimed $20,000 tax.
Received $10,000 refund
2021 return
Claim $33,333 as income.
Claimed $0 tax??
Owe $6,000
2022 return
Claim $33,333 as income.
Claim $0 tax.
Owe
Yes, that is correct.
The federal tax withheld can only be applied to that tax year.
You could have applied the "refund" to the following year.
So in your case, you took the distribution and paid what you hoped would be the full tax (20%) in 2020.
BUT when it came to filing the return for 2020, you only claimed 1/3 the income, but still claimed 100% of the tax you paid, so you received a large refund of that tax withheld.
The next two years you continue to report 1/3 the income, but the tax withheld has already bee refunded, so the original tax paid is not reported anymore.
Again, you could have applied (or forwarded) the refund to the next year knowing you would have this income to report, or made estimated tax payments. At this point, you can make estimated tax payments for the tax you will owe for the distribution you will need to claim on your 2022 tax return. You also have the option to have additional tax withheld from your wages if you are still working.
