Distribution from retirement account due to disaster

[Dottie Fauci]

For 2020 the IRS has an exemption for the early withdrawl penalty from retirement accounts due to disasters - and COVID is one. Some people have told my client that they didn't pay tax on this distribution. I've told my client they have to pay the tax but not the penalty, which Proseries has calculated. I've used the 3 year option to spread the income. Is it possible that they don't have to pay any tax on this distribution? They were less than $100,000. 

[Just-Lisa-Now-]

Its taxable, BUT when the income is spread out over 3 years with ALL the withholding being applied toward the 1/3 of the income on the 2020 return, Im sure many people haven't felt the tax burden from these monies (which is why they think they didnt pay any tax on it) on the 2020 return...but 2021 and 2022 are going to be quite painful for them.

[Dottie Fauci]

Yes I've warned my client about the next 2 years. They still opted to spread it out. 

[TaxGuyBill]

Tax applies, there is no special exception for that.

I also want to point out the waiver of the penalty and the ability to spread it out due to Covid is only for qualified people.  While many people qualify, it is NOT an an all-encompassing thing for everybody.  So be sure to read the Instructions for Form 8915-E to make sure your client qualifies.

[qbteachmt]

Start with the IRS article:

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