NJ 401K Covid Distribution Repayment

Forum|Forum|5 years ago
March 3, 2021
1 reply
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A client took a $75,000 distribution from their 401K that qualified as Covid disaster relief. They paid back $25,000 before the end of the year. Because only 1/3 is taxable in the first year and they paid that 1/3 back they owe no federal tax on it. The full $75,000 is showing as taxable on their NJ return. Dos NJ not let you deduct the $25,000 which was repaid?

ProSeries Professional

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qbteachmt

Level 15

I'm not sure you have the math correct. Taking $75k, returning $25k, means there is $50k to either report in the first year or spread over three years.

From the 8915-E instructions: "Include on 2020 Form 8915-E any
repayments you make before filing your 2020
return. Any repayments you make will reduce
the amount of qualified 2020 disaster
distributions reported on your return for
2020. Do not include on your 2020 Form
8915-E any repayments you make later than
the due date (including extensions) for filing
your 2020 return. If you make a repayment in
2021 after you file your 2020 return, the
repayment will reduce the amount of your
qualified 2020 disaster distributions included
in income on your 2021 return if you have
spread the income over 3 years, unless you
are eligible to amend your 2020 return."

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B

BeckerMgtAuthor

Level 3

I didn't do the math, the way I described it is how ProSeries is handling it on the 8915. 1/3 of the tax is due each year. They paid back 1/3 in the first year, which is what would've been taxable, so there are no taxes due in the first year. That is how ProSeries is calculating it on the 8915 and that sounds correct to me. So my question is then on the NJ return. If someone takes a 401k distribution but then immediately pays a portion of it back is the payback amount tax-exempt to NJ and where do I report that on the NJ-1040?

qbteachmt

Level 15

Thanks for your clarification on the NJ rule comparing this to a rollover. I don't see on the NJ1040 where to enter the rollover portion so I suppose I'll just override the amount and enter a note with an explanation.

How you are describing the Federal handling of the 1/3 is not at all how form 8915 is setup and not at all how ProSeries is handling it. On the 8915 line 9 breaks out 1/3 of the total distribution as taxable. Line 10 asks for the repayment amount. Line 11 subtracts 10 from 9 and is the 2020 taxable amount. Since lines 9 and 10 are equal on my return there is no tax due. Since the repayment was made in the same year no amended return will need to be filed.

If they had not made the repayment in 2020 they would owe 1/3 of the tax. If they repaid 2/3 in 2021 they wouldn't owe tax for the 1/3 in 2021 and they could file an amended return for 2020 to get those 1/3 taxes refunded.

I guess this is the issue, then: "Dos NJ not let you deduct the $25,000 which was repaid?"

Because it should be treating it as a rollover. But I'm not current on NJ nonconformity.

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