I closed out a smaller retirement account last year for assistance during covid times. When entering the 1099-R now in Turbo Tax deluxe, I checked yes for covid19 related but it removed 7k in taxes due versus the 2k that the 10% additional penalty would have been. ? That sounds wrong and cannot understand why. Seems I would still owe 5k still after the 2k 10% penalty was be removed. I haven't submitted them yet. Can anyone explain?
COVID allows you to spread the money over 3 years using form 8915E. That would account for the larger difference. See Form 8915-E: Qualified 2020 Disaster Retirement Plan Distributions and Repayments,
The IRS updated form 5329’s instructions to make it clear that COVID related exceptions cannot use 5329 and should use the new 8915-E.
In addition, you have those 3 years to repay the money. So you may be able to repay some of it in the next 2 years and not have to pay the full tax on your distribution.