COVID 19 DISTRIBUTION REPAYMENT/HOME PURCHASE

[HTS]

HELLO ALL,

I have a client that pulled COVID 19 Distribution to purchase a home and because they had COVID. They are starting the repayment process and would like to avoid paying the income received from the Distribution. Is there any guidance with Proseries products? Or does the client have to pay the income tax received over the 3 years using Form 8915-E?

Thanks,

RH

[TaxGuyBill · Accepted solution]

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@HTS wrote:

They are starting the repayment process

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What does "starting the repayment process" mean?

It depends on (a) what year the recontribution was made and (b) if you are using the 1 year inclusion or 3 year spread.  Read Notice 2020-50, starting on page 13:

https://www.irs.gov/pub/irs-drop/n-20-50.pdf#page=13

[qbteachmt]

You didn't specify how much they "pulled" from which type of account(s).

You cannot have one distribution that is Both because of covid and to buy a house. It would be one, the other, or a split (to avoid hitting a limit?) or some detail is missing. The Form 8915-E is a disaster distribution form, so "fixing my house that got damaged" would be Disaster-related. Buying a house is not a disaster issue unless it is in a disaster area.

And the Repayment process would not apply to non-disaster "bought a home" distributions. So, make sure to read the instructions for Form 8915-E, before trying to make allocations and trying to assign exactly what was distributed that also is being repaid under the Disaster provisions.

"Or does the client have to pay the income tax received over the 3 years using Form 8915-E?"

Yes, you have a lot of hoops to jump through, and you have to determine what qualifies. Example:

You determine the distribution is "only going to be called covid disaster related" and that means any 2021 repayment must follow the provisions for covid distribution found in those instructions, which includes if the repayment is made before the due date of the 2020 return plus extension, if there is a filed 1040 to amend (even from a prior year, such as amending 2020), etc.

You have a lot of hoops to jump through and some to ignore.