Help understanding 8915-F

[AngusIL]

I submitted form 8915E last year to report COVID related investment withdrawals ($19,000 Part II, 60,000 Part III). Both had 20% federal tax taken out at the time of withdrawal.  I claimed 1/3rd of the income in 2020 and received back a hefty refund. 

I'm now claiming the second 1/3 on 8915-F, but my taxes now adjust to say I owe $5000 (instead of a refund of $1700.  It looks like the process is not identifying the fact that Federal taxes (20%) was already taken out, nor should I be paying the 10% pre-payment penalty.

Is this amount expected to be this different?

Angus.

[DaveF1006]

You were actually given full credit for the taxes withheld in your 2020 return as these were not designed to be spread over a three-year period. This is part of the reason why you received your hefty refund last year. 

To see if you received your total taxes withheld from your 1099R's from 2020, check your 2020 1040 and look on line 25b to see if the total amounts of your withholdings are reflected there.

[AngusIL]

Thanks!  I do have the tax amount listed on my 2020 1040.  I'm still struggling as to how this 8915 process works.   I withdrew funds and paid 20%.  I did not pay the early withdrawal penalty of 10%.

Did I get a a 1/3rd credit on the 20% when I filed 2020 taxes; and now I'm paying the next 1/3rd?

I shouldn't have to pay 20%, then 10% penalty; then income tax on the remaining, should I?

[fanfare]

if you divided by 3.0 you elected to report and pay tax on 1/3 in 2020, 1/3 in 2021, and 1/3 in 2022.

That's how the process works.

What's not to understand?

[JamesG1]

You paid Federal income taxes on 1/3 in 2020.  Any extra withholding on the 2020 Federal tax return was likely refunded to you one year ago.

You will pay Federal income taxes on 1/3 on the 2021 tax return.  The 1/3 is likely reported on line 4b and/or line 5b.  If there is a penalty, you will see it reflected on Schedule 3 and on line 20 of the Federal 1040.

The final third will be reported on the 2022 Federal 1040 tax return.

@AngusIL

[fanfare]

There was no 10% early withdrawal penalty on a covid-related distribution.

only a covid distribution or FEMA designated disaster distribution could be spread over three years.

[SDun12]

While the income was spread over 3 years, the 20% tax withholding taken in the first year did not.  

The withholding would have been used in the calculation of your tax refund/balance on your 2020 return.  

When you input the 1/3 that is being reported as income in 2021, you're seeing the result of the income tax on that amount (but you should not see the penalty - so refer to the schedule mentioned above for where to look to be sure it is not there.)

[AngusIL]

Unfortunately this answer is not helpful.  The last two sentences are unnecessarily written.  No need to treat someone who doesn't understand the tax code this way.  Obviously if I understood this, I wouldn't have type the message.

The original post isn't about how I report and have taxes deferred in three parts.... rather that why isn't my second part not properly reporting that I already paid the 20% tax? It seems like I'm getting hit twice this year.

[AngusIL]

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

[KrisD15 · Accepted solution]

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.