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Should I be paying a 10% tax liability on a 1099-R when 10% was already withheld in box 4?

Forum|Forum|7 years ago
June 1, 2019
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The 1099-R is for a hardship withdrawal from a 403(b). The gross distribution (box 1) is $12, 180. We withheld 10% of that-- (box 4) is $1, 218.00. While there is no exception to the distribution (box 7 is a "1"), why is Turbo Tax saying we're still liable for 10% tax penalty when it was already withheld? It's as if we're paying it twice.

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Best answer by ChristinaS

This is not an unusual surprise- many people make an early withdrawal without fully understanding the tax consequences.

A hardship withdrawal does not relate to taxes. When you have a hardship withdrawal from a 401(k) or 403(b), it only means that they let you get your hands on some money. Having a qualifying hardship in the eyes of your 403(b) custodian does not mean you are exempt from the early distribution penalty.

Holding out 10% is rarely enough, because you have to cover both your income tax liability and the penalty. So, while you may have withheld enough to cover the penalty, you didn't withhold any extra to cover regular tax liability.

You don't pay taxes when they withhold. They are withholding in anticipation of what you would owe on your tax return, which is a combination of all of your income. This is essentially the same as when you work- they withhold from your pay, and hopefully they withhold enough. Your tax liability is not calculated until you prepare your tax return, as we don't have a flat tax system.

"Hardship" is not an exception to the penalty, but there are some exceptions laid out in this IRS publication:

https://www.irs.gov/taxtopics/tc558.html

Many of them are just not common, so I will list what I believe to be the 2 most common below:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (state or local government) who separated from service in or after the year you reached age 50.

Distributions made because you're totally and permanently disabled.

C

ChristinaSAnswer

Employee

This is not an unusual surprise- many people make an early withdrawal without fully understanding the tax consequences.

A hardship withdrawal does not relate to taxes. When you have a hardship withdrawal from a 401(k) or 403(b), it only means that they let you get your hands on some money. Having a qualifying hardship in the eyes of your 403(b) custodian does not mean you are exempt from the early distribution penalty.

Holding out 10% is rarely enough, because you have to cover both your income tax liability and the penalty. So, while you may have withheld enough to cover the penalty, you didn't withhold any extra to cover regular tax liability.

You don't pay taxes when they withhold. They are withholding in anticipation of what you would owe on your tax return, which is a combination of all of your income. This is essentially the same as when you work- they withhold from your pay, and hopefully they withhold enough. Your tax liability is not calculated until you prepare your tax return, as we don't have a flat tax system.

"Hardship" is not an exception to the penalty, but there are some exceptions laid out in this IRS publication:

https://www.irs.gov/taxtopics/tc558.html

Many of them are just not common, so I will list what I believe to be the 2 most common below:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (state or local government) who separated from service in or after the year you reached age 50.

Distributions made because you're totally and permanently disabled.

D

dmertz

Employee

You are not paying the same taxes on the same money twice. Your tax liability attributable to the IRA distribution is not known until you prepare your tax return because it depends on the amount of your other income. The taxes withheld from your distribution are combined with the taxes withheld from other sources and applied as a credit toward the overall tax liability calculated on your tax return. Given that the distribution is subject to an early-distribution penalty, the 10% withheld is only sufficient to cover the penalty, not the ordinary income taxes resulting from the distribution.