2020 Coronavirus-related distribution penalty for early withdrawal

[2084]

I entered distribution information for a client that qualified for the 2020 Coronavirus-related distribution and also checked on the 8915-e to see if there was a location to remove the penalty for early withdrawal code 1 associated with the distribution on the form 1099R.  The total distribution was $50,000. but he is only using $30,000.00 of that for the qualified disaster amount.  I am still coming up with a Early Withdrawal penalty on Schedule 2.  What I need to do to correct.

[Just-Lisa-Now-]

Did you check the Covid disaster boxes on the 1099R worksheet?

[dkh]

The 1099R worksheet has Qualified Disaster Distribution Smart Worksheet.   Check the appropriate box for Option A  and do your money split in Option B

You will have a penalty on the $20K

[qbteachmt]

If he is under 59 1/2, then it's right here in your description: "but he is only using $30,000.00 of that for the qualified disaster amount. I am still coming up with a Early Withdrawal penalty on Schedule 2. What I need to do to correct."

You cannot split this into Portions, then expect the early part not being declared as Disaster, to fall under Disaster exclusion.

You realize there is nothing that asks what it got used for? Why are you splitting the $50k at all?

[2084]

Yes.  I checked the 2020 Coronavirus-related Distribution under Part A and and On B I put in $30000.00 0n the "or amount that is qualified" space.  What appeared on the Schedule 2 was the amount equaling 1/3 of the penalty that would be applied on the amount of the $30,000. allocated to this year.  I looked on the 8915 and saw nothing pertaining to the early withdrawal penalty.  The only thing that I could think of was to change the code on the 1099-r from 1 early distribution to code 7 ordinary distribution but wouldn't want to create a situation with IRS.  Thanks for any suggestions that you may have.  I will also check to see if there is a new code relating to disaster withdrawals now that I'm thinking of it.

[qbteachmt]

"I looked on the 8915 and saw nothing pertaining to the early withdrawal penalty."

Because it's on the 1099-R worksheet. But you also need to pay attention to Partial Disaster, and part is Not.

"The only thing that I could think of was to change the code on the 1099-r from 1 early distribution to code 7 ordinary distribution but wouldn't want to create a situation with IRS."

You don't make that change. You have already been presented with a 1099-R. You didn't originate it and you don't change what was presented on it. You deal with what happened because of that distribution.

You should have early penalty on the $20k, which is sad and doesn't need to be part of that taxpayer's costs at all.

[2084]

You are correct about the Penalty on the $20,000.balance.....I was concentrating too much on the qualified amount.... 

There were a couple of reasons for the $30,000.00 being qualified.  Client withdrew the funds in three different segments.  The first was when he became unemployed, and the same with the second.  The third for $20,000. was taken out after he was rehired. He originally took a good amount of withholding to cover the penalties.  He still has some of the $20,000 in savings and used some for a celebration vacation.  I explained to him that he could put it back into the retirement fund to avoid more tax.  He is getting a small refund this year and said that he would consider putting some or all back over the next couple of years but was hesitant and didn't want to put it back in just to have to pull it back out again.  He is employed in the resort industry and feels a bit insecure about it.

You are correct on the 1099-R... and I was only putting it out there to start some thinking into adding another code to cover disasters in the future.

[qbteachmt]

"He still has some of the $20,000 in savings and used some for a celebration vacation"

The IRS does not care. That's the point. $100,000 is the limit for disaster treatment. Over this would be the reportable taxable early Partial. Your taxpayer doesn't have this condition.

Stop considering where the money Went. Work on Getting the money, first. That's the point of the tax form 8915-E. Read it:

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

"Coronavirus-related distributions. A coronavirus-related distribution is a retirement plan distribution that was made:

1.In 2020 before December 31, 2020; and

2.To a qualified individual. See Qualified individuals next for details.

If (1) and (2) apply, you can generally designate any distribution (including periodic payments and required minimum distributions) from an eligible retirement plan as a coronavirus-related distribution, regardless of why the distribution was made. Coronavirus-related distributions are permitted without regard to your need."