Tax question

[Fredkrueger100]

My wife lost her job of 16 years back in early October. She just recently got another job but doesn’t start until the 15th of next month. We had to use her 401k money to pay off a bunch of our debt. When she was taking it out the lady had her fill out a Covid 19 withdrawal form. It was approved and she was able to withdraw the money without the 10% penalty. It was $68,000. She went to do our taxes last night using turbo tax as we do every year. She had entered all our info except for her unemployment payments since she hasn’t gotten the W2 yet. We were gonna come back in and add that in a few days once the W2 comes in.

We chose to not withhold the taxes on it so we could get more money back to live on until she found her a job. We also had some put back for the taxes. Before she entered the 401k into the system our federal return was gonna give us around $2700 and the state was about $1200. Then she entered the 401k into it and instead of getting money back it then said we owed $22,000 to federal and over $2700 to state!! It did mention some things about Covid and being able to pay out the taxes over three years and also mentioned the forgiveness of the penalty due to Covid. Are there any tax professionals on here that could answer why this is happening? I understand we owe taxes on that money but my gosh that is an absurd amount of money. Far more than they took out for federal, SS and Medicare on my wife who made right at about $82,000.

I pray this isn’t right because we don’t have that kind of money to pay it off and won’t be able to afford the payment that I’m sure the IRS would require us to pay to pay it off. We are taking it to a local tax preparer that my dad uses but that ain’t till next week and this is really making me depressed. I just don’t see how it is possible it could be that much. It doesn’t make sense to me. Any help is greatly appreciated.

 

[Chief Sapulpa]

ps://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers


Sent from my iPhone using Tapatalk

 

[tyromeo55]

The best advice I can give you is to hire a real tax professional. TurboTax it absolutely horrible. For years I would use TurboTax to check my accountants final figure. Not once was I better off using the online service even when I include the fee

 

[SlugSlinger]

From the link above. Pretty straightforward.

The .gov waived the penalty, but not the income taxes. The 401K contributions are pretax of withholdings. The distributions are taxable.

Do you plan to repay the distribution? If so, enter the $22,666.67 instead of the $68,000 distribution and see how that impacts the owed taxes. You can also contribute to a traditional IRA to lower your income. This should offset some of the taxes.

(enter $22,666.67 even if you do not plan to repay the distribution. this will spread the taxes over 3 years and reduce your marginal income tax rate for 2020.)

Q6. When do I have to pay taxes on coronavirus-related distributions?
A6. The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.

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.

 

[tRidiot]

Sounds like about 30-35% taxes - which sounds about right? I'm assuming you guys are over the $100k mark in income usually, and with a 9-10 months of salary and then a $68,000 lump sum, yeah, taxes gonna suck.

I feel for you, I know what it's like to get stuck in a situation like that. I at one point was $80k in the hole to the IRS, learned my lesson on that one and it ain't gonna happen again.

I'll pray for your family, but definitely talk to a tax pro. You can put those payments off, but it is gonna complicate things for quite a while for you.

 

[Neanderthal]

Good luck to you! I would recommend seeking professional help. Unwittingly, we went through the same thing. We withdrew 401k early for an emergency and now we owe the IRS to the tune of 14k.

 

[Uncle TK]

Turbo Tax and other tax software.
Are not the final version at the end of January 2021 they will be updated.
But you will still get a big tax bite

 

[Fredkrueger100]

I’m hoping as some have said that we can split it up over three years and add the $22,666 to earned income for each of the next three years. Hopefully that will save us from having to pay a large amount. Thanks for y’all’s help. I called the tax lady and she wasn’t there but I left a message.

 

[El Pablo]

The best advice I can give you is to hire a real tax professional. TurboTax it absolutely horrible. For years I would use TurboTax to check my accountants final figure. Not once was I better off using the online service even when I include the fee

As some who may have consulted there a few years ago... I don’t use it.

 

[Bchance]

My wife lost her job of 16 years back in early October. She just recently got another job but doesn’t start until the 15th of next month. We had to use her 401k money to pay off a bunch of our debt. When she was taking it out the lady had her fill out a Covid 19 withdrawal form. It was approved and she was able to withdraw the money without the 10% penalty. It was $68,000. She went to do our taxes last night using turbo tax as we do every year. She had entered all our info except for her unemployment payments since she hasn’t gotten the W2 yet. We were gonna come back in and add that in a few days once the W2 comes in.

We chose to not withhold the taxes on it so we could get more money back to live on until she found her a job. We also had some put back for the taxes. Before she entered the 401k into the system our federal return was gonna give us around $2700 and the state was about $1200. Then she entered the 401k into it and instead of getting money back it then said we owed $22,000 to federal and over $2700 to state!! It did mention some things about Covid and being able to pay out the taxes over three years and also mentioned the forgiveness of the penalty due to Covid. Are there any tax professionals on here that could answer why this is happening? I understand we owe taxes on that money but my gosh that is an absurd amount of money. Far more than they took out for federal, SS and Medicare on my wife who made right at about $82,000.

I pray this isn’t right because we don’t have that kind of money to pay it off and won’t be able to afford the payment that I’m sure the IRS would require us to pay to pay it off. We are taking it to a local tax preparer that my dad uses but that ain’t till next week and this is really making me depressed. I just don’t see how it is possible it could be that much. It doesn’t make sense to me. Any help is greatly appreciated.

I’m an accountant, not a CPA (working on that), with that said, Turbo tax serves its purpose to some extent but also hurts a lot of people. I’ve corrected a lot of turbo tax returns.
Yes, you’ll pay the income tax but as stated above, it can be spread out. Also, our tax brackets are progressive, meaning that just because you “jump” into a higher tax bracket doesn’t mean you’re taxed fully in that bracket. Only the amount that went over the prior tax bracket. That doesn’t seem correct unless you have other sources of income and/or no withholding. Feel free to PM me, otherwise, ditch Turbo Tax.