Under the cares act I withdrew $100k, but my employer held back $5k for state income tax. I rolled over $95k to another IRA. When I go through all of the questions in turbotax, I am now getting a penalty on the $5k for federal and state income tax. Shouldn't I have the option to now roll that money back into my IRA after I get it back from the state without taking the penalty? I had no choice in the $5k being held back, and now I'm getting penalized for it. That doesn't seem right. Any help on how I should approach this, or how to handle this in TurboTax so I am not penalized.
If you made a withdrawal from your employer's qualified plan (like a 401k), you should have received a form 1099-R. In box 14 it should show your $5K as State Tax Withheld. If it was Federal withholding, then the amount would be in box 4. If you did not receive a form 1099-R, contact your employer or whoever manages the employer's plan and request a duplicate.
Yes, I received a 1099R with that info, but that doesn't change the way you have to enter it into TurboTax. It is still showing that I have a penalty to pay for the $5k that was withheld for state taxes, since I was only able to roll over $95k instead of the full $100k.
If marked as a COVID distribution, there is no penalty (or should not be) on the $5,000.
It is taxable, since you did not return it before the deadline to do so passed.
But if we pay the full amount back, why should we get taxed on the distribution?
@cc1790 wrote:
But if we pay the full amount back, why should we get taxed on the distribution?
Because the distribution is taxable income reported on your tax return. Why would you think it would not be taxable income?
IRS Form 8915-E instructions - https://www.irs.gov/pub/irs-pdf/i8915e.pdf
How Is a Qualified 2020 Disaster Distribution Taxed?
Generally, a qualified 2020 disaster distribution is included in your income in equal amounts over 3 years. However, if you elect, you can include the entire distribution in your income in the year of the distribution.
I just looked this up on the IRS site, I still don't believe Turbo Tax has this right.
Q7. May I repay a coronavirus-related distribution?
A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.
If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.
@cc1790 wrote:
I just looked this up on the IRS site, I still don't believe Turbo Tax has this right.
Q7. May I repay a coronavirus-related distribution?
A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.
If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.
That is correct. Have you repaid any of the distribution in 2020?
Yes, I've repaid all but the $5k that was held out for taxes. I was planning on repaying that after I get it back from my State Income tax, but having to file an amended return looks like a hassle. It seems like Turbo Tax could handle this better by asking me if I plan to repay this so I don't have to file and amendment. Looks like I need to break down and go to a tax attorney to get this handled correctly and to avoid the penalties. Not blaming TurboTax here as the govt took their sweet time in coming out with appropriate forms and how to handle this, but I believe there are situations that Turbo Tax is not covering yet.
@cc1790 wrote:
Yes, I've repaid all but the $5k that was held out for taxes. I was planning on repaying that after I get it back from my State Income tax, but having to file an amended return looks like a hassle. It seems like Turbo Tax could handle this better by asking me if I plan to repay this so I don't have to file and amendment. Looks like I need to break down and go to a tax attorney to get this handled correctly and to avoid the penalties. Not blaming TurboTax here as the govt took their sweet time in coming out with appropriate forms and how to handle this, but I believe there are situations that Turbo Tax is not covering yet.
If you repaid the distribution in 2020 then none of the distribution would be entered on your 2020 tax return. The taxes withheld from the distribution are entered on your 2020 federal tax return as a tax payment on the Form 1040 Line 25b. You will get a federal tax refund if your total tax payments are greater than your total tax liabilities.
There is nothing the legislation that provides for you to spread the taxes withheld over 3 years, only the distribution. The taxes withheld can only be entered on the tax return for the year they were withheld.