Don't Mess With Taxes

Have coronavirus money troubles forced you to break into some of your next eggs? COVID-19 legislation made getting to retirement money easier, but you probably will still owe tax on the early withdrawals and must deal with a new form to report your distributions (or paybacks) to the IRS at filing time.

With the holidays here and no additional immediate COVID-19 economic relief payment in sight, some folks likely have or are considering tapping their retirement accounts.

That option was made easier as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27. It provides more favorable tax treatment for withdrawals of up to $100,000 from retirement plans and IRAs, as well as allows in some circumstances for expanded workplace plan loan options, as long as the need for the money is coronavirus-related.

With the pandemic's second surge upon us, more folks are finding they're in coronavirus-related distribution (CRD) territory.

COVID stop-gap funds: My earlier post on tapping your retirement plan to cover COVID costs has more on this financial move, but here are some highlights:

• When you take money out of a traditional retirement vehicle — typically a tax-deferred IRA or 401(k) or 403(b) workplace plan — before you reach age 59½, you usually face a 10 percent penalty. That fine is waived for 2020 withdrawals.
• You still, however, will owe tax on any of the money you withdraw. But that tax amount can be paid over three years, beginning with the payout year. If you prefer, you still have the option to pay the tax in full with your tax return filing for the year you got the distribution.
• If within three years you recontribute the money you withdrew to make ends meet during the pandemic, your distribution will be treated as a rollover. That means you won't owe tax on the repaid retirement funds.

New pandemic withdrawal/pay-back form: Of course, if you do take money from a retirement account to help you make it through COVID-19 financial difficulties, you'll also face some added fling tasks.

Today's Tax Form Tuesday looks at a new form connected to these coronavirus retirement account distributions.

UPDATE, Feb. 18, 2021: It is Form 8915-E, which allows you to spread out the tax owed on these retirement payouts. Note that this form has now been finalized, as have its instructions. Download it or update your tax software.

The two-page form still is just a draft, hence the notation on the excerpt below. But it, as well as the draft instructions, give us an idea of what the Internal Revenue Service will want from taxpayers in this situation at filing time.

One thing to note when it comes to filing your first 8915-E is how you want to pay the tax due on your retirement plan distribution.

As discussed in the highlights bullet points, you can choose to either spread the income ratably over three years or report it all in year one. Whatever tax payment method you choose on your initial tax filing, you're stuck with it. You cannot change it.

Reporting repayments, too: Also, Form 8915-E is dual purpose. If you are able to pay back any or all of your CRD within three years, you'll use this same form to let the IRS know you put the money back into your retirement plan.

Finally, when you do repay your emergency COVID-19 retirement distribution within the allowable time frame, you'll need to file yet another form.

You can recover the income tax you paid on the distribution by filing an amended tax return. You'll do that by filing Form 1040-X, which was featured earlier this year in an August Tax Form Tuesday post

You also might find these items of interest:

• Made a tax mistake? Make amends!
• Old-fashioned amended return filings could cost IRS billions
• 5 things to know about workplace retirement plan hardship withdrawals

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