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Why is turbo tax not factoring this in and still charging me the 10% early withdrawal penalty?

Forum|Forum|5 years ago
January 28, 2021
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I took money to survive out of my 401k due to being laid off because of the COVID 19 pandemic. I'm still not back to work and its been 9 months. Why is turbo tax not factoring this in and still charging me the 10% early withdrawal penalty?

TurboTax Deluxe Online

Best answer by DawnC

The forms you need are not in TurboTax YET. If you took a distribution from a retirement account due to coronavirus related issues, you will be able to waive the penalty and spread the ordinary tax over tax years 2020-2022. However, the forms have not been finalized by the IRS yet, so TurboTax has not been updated. Once the forms are final (no date determined by IRS yet), you will see the options to apply the tax relief provisions on Form 8915-E (covid-related relief). Visit this FAQ to sign up to be notified when it is ready

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty. You qualify if:

You, your spouse, or your dependent are diagnosed with COVID-19
You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
You had work hours reduced to COVID-19
You’re unable to work due to child care closure or hour reduction

The distribution would be taxed over 2020, 2021, and 2022. You’ll have that time to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions, and if you pay back the amount within that time, you’ll be able to claim a refund on those taxes.

As things change, TurboTax is continually updated and able to handle every situation that arises to ensure your taxes are done right, so you’ll receive your maximum refund.

T

ThomasM125

After you enter your form 1099-R in TuroTax, you will come to a screen that says Did you use your IRA or pay for any of these expenses? You need to enter your distribution amount in the last box that says Another reason, and then you won't get the penalty.

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S

shafer0219Author

I actually did that but how will the IRS know it was due to COVID if you put it under other. When I originally came to that section where I entered my 1099-R it stated Turbo Tax doesn't have the means to complete it and to try again later.

macuser_22

Employee

@shafer0219 wrote:

I actually did that but how will the IRS know it was due to COVID if you put it under other.

They won't - which is why this must be reported properly as a COVID-19 related distribution on line 1 of the new 8915-E form (that does not exist yet). You need to wait for that form.

Choosing "Another Reason" will put it on the 5329 form which is only half of reporting. The 5329 instructions say:

What’s New
Qualified disaster or coronavirus-related
distributions. The additional tax
on early distributions doesn't apply to
qualified disaster or coronavirus-related
distributions. See Form 8915-E for more
details.

CARES Act allowed retirement plan COVID-19 related distributions and that can be paid back over 3 years or the tax spread over 3 years - it also eliminated the 10% early distribution penalty.

That is reported on a new 8915-E form that is not yet available and there is no estimated release date since the form is still in the draft state at the IRS. There is no telling how long it will take the IRS to make the electronic form available. Typical it takes the IRS 2-4 weeks to release the electronic form specifications after the paper version is released. e-file providers must program from the electronic specifications.

The draft paper form is here:

https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf
https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

Also to see if you qualify for a COVID-19 related distribution see:
https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**