IRA Distribution

[wethepeople]

I am preparing a 2020 joint return and the spouse received a Form 1099-R with a 1 in the Distribution Code box.  Further down on the entry form is a section entitled Qualified Disaster Distribution Smart Worksheet with several boxes to check if applicable.  My client does not have any of the typical casualty losses, but I.m wondering if she can check the Coronavirus box.  What are the qualification to check this box?

I understand that if she qualifies she can include Form 8915-E and avoid the 10% early withdrawal penalty.  She is not interested in spreading the distribution over three (3) years..

[qbteachmt]

"if she can check the Coronavirus box. What are the qualification to check this box?"

Q3 and Q4:

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

[rcooley25]

Since it is a 2020 tax return she can check off the box for corona virus and spread out over 3 years if certain circumstances  exist. First did the distribution have anything to do with the pandimic. If this was case where she was drawing it out ayway then the answer is no. Many individuals in the trades had the opportunity to take large amount of money out of their 401 k without any early withdrawl penalty and spread it out over 3 years. Does your client fall into this catergory. If not there is no way legally they can claim corona virus and will have to pay taxes on the whole amount and since it is code 1 they have a 10percent withdrawl penalty. There are some other concerns regarding 2021 but get thru 2020 first.

[wethepeople]

Thanks for reply to my question.

As I understand it, if the spouse does not want to spread the distribution out over the three year period, the main, if not, the only effect on the tax return is the elimination of the 10% early withdrawal penalty.

Is this correct?

[wethepeople]

Thanks for your reply to my question.

What did you mean by writing Q3 and Q4?

[dkh]

Correct

[qbteachmt]

"What did you mean by writing Q3 and Q4?"

Click the link I provided. Read Question 3 and Question 4; they apply directly to what you asked.

[rcooley25]

I dont beleve so. Since the 1099r  will be marked code 1 and the boxes for the virus is not checked then it will not be sread over 3 years and the 10 percent  penalty applies.

[dkh]

You can elect out of the 3year spread on Form 8915-E.  The 1099R would need marked it is a Corona virus distribution which eliminates the 10% penalty.   So yes, you can report 100% of distribution on 2020 return and not pay 10% penalty.

[qbteachmt]

"The 1099R would need marked it is a Corona virus distribution which eliminates the 10% penalty"

If it qualifies.

[wethepeople]

I reviewed the five (5) requirements that you sent me that my client must satisfy for purposes of section 2202 of the Cares Act and the only one that is satisfied is the last one which reads 'You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2or COVID--19.'

The taxpayer believes he meets this requirement. He is self-employed and did receive unemployment compensation which he reported and received the special deduction on that. His self-employment income decreased significantly in 2020.

Remember the spouse is the recipient of the IRA Distribution with the Code 1 box checked since she is under age 591/2. She did not meet any of the qualifications.

Can they check the Coronavirus box on the Form 1099-R and get the 10% early withdrawal penalty eliminated?

[dkh]

If I was preparing their return, I would take the Coronavirus distribution exemption. 

[qbteachmt]

"and the only one that is satisfied"

It's an or condition. I didn't send you anything; I referred you to the IRS, where the eligibility requirements are listed. "Or" = one of these needs to be applicable, for the taxpayer to qualify.

"Remember the spouse is the recipient of the IRA Distribution with the Code 1 box checked since she is under age 591/2. She did not meet any of the qualifications."

Did you look to see if the date of the distribution falls in the date range of the disaster, per that IRS info? Are they MFJ, so that his impact also is her impact?

[wethepeople]

Now that the release regarding Form 8915-F has been made, i understand from reviewing the Qualified 2020 Disaster Retirement Plan Distributions and Repayments Worksheet that the benefits afforded to qualified individuals who received IRA Distributions such as the elimination of the 10% early withdrawal penalty do not apply to similar distributions in 2021.

Is this correct?

[qbteachmt]

"the benefits afforded to qualified individuals who received IRA Distributions such as the elimination of the 10% early withdrawal penalty do not apply to similar distributions in 2021.

Is this correct?"

Yes and no.

The provision for special treatment for Disaster distributions was not new for covid. It's the reason the Form 8915- family is up to F, now. And the differing provisions would be tax-year dependent, as well as disaster-dependent.

You cannot use a broad brush stroke for this topic. For example, "covid" distributions ended on Dec 30, 2020. There are no "similar" distributions from Dec 31, 2020 and beyond.

You have to look up the rules that apply for the specific scenario. Right now, there are a surprising amount of topics where someone took their distribution from a 401(k) in 2021, and they seem to think the 10% doesn't apply, when really, all that happened is they submitted to their plan administrator for an allowable distribution, which does not also make it exempt from early withdrawal penalty.

[wethepeople]

The Worksheet that was provided for Form 8915-F states the following:

Coronavirus-related distributions cannot be made in 2021.

I understand that to mean that a similar IRA distribution in 2021 does not provide the benefit that it did in 2020, namely the elimination of the 10% early withdrawal penalty.

[dkh · Accepted solution]

Correct

[qbteachmt]

"I understand that to mean that a similar IRA distribution in 2021 does not provide the benefit that it did in 2020, namely the elimination of the 10% early withdrawal penalty."

That's not what it means.

It is not unusual for a payout to come the year after a declared disaster, such as, a storm hits in Dec, that is declared a disaster, it qualifies for hardship or disaster distribution, but the distribution isn't until a couple of months later, once people figure out what is the effect of the disaster and what are their needs and what won't FEMA cover.

But that isn't true for covid. To be Qualified, any distributions for covid had to happened no later than Dec 30, 2020. There is no "similar" covid distribution.

Either a distribution Qualifies or it does not. covid distributions do not exist as of Dec 31, 2020.

[wethepeople]

Ergo, since the souse received the IRA distribution in 2021, it does not qualify for the elimination of the 10% early withdrawal penalty even though it did in 2020 when her husband met one of the eligibility requirements in that year.

[qbteachmt]

"received the IRA distribution in 2021"

You mean, received a distribution of some sort, from some plan or account.

"it does not qualify for the elimination of the 10% early withdrawal penalty"

You don't know this. Other than it's not a covid distribution by definition; you might find there is a qualifying scenario.

What you keep basing it on, here, has nothing to do with their reality. You have "no known exception" from the Issuer. Not for the taxpayer. Have you looked up the exceptions? Does she qualify? There still are plenty of exceptions.

The IRS knows:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

[wethepeople]

Thanks for sending the link showing the non-coronavirus exceptions to the 10% additional tax.

The only one that I think might apply is the Medical one.  It states the following:

amount of unreimbursed medical expenses (>10% AGI for 2021).

The spouse pays a large amount for health insurance for her and her husband, and this amount may be greater than 10% of their joint Adjusted Gross Income.

If this is true, would they qualify and thus not be subject to the 10% additional early distribution tax by inserting exception number 05 in Part 1, Line 2 of Form 5329?

[qbteachmt]

Wow, it really shows the 10%? They extended the 7.5%.

"by inserting exception number 05 in Part 1, Line 2 of Form 5329?"

What happens when you use that in the program?

[wethepeople]

The penalty was eliminated in 2021 by attaching Form 5329.with a code 05.

I would think that if the client didn't qualify for the coronavirus relief in 2020 they might qualify by filing Form 5329 if, for example, they meet the Medical exception. Of course they wouldn't be able to spread the distribution over three (3) years. 

[wethepeople]

Since there is no coronavirus relief for IRA distributions in 2021, I understand the only way my client can avoid the 10% early withdrawal tax on that distribution is satisfy one of the exceptions to that tax.

This is done by completing and attaching to their joint federal income tax return Form 5329.

Is this correct?

[qbteachmt]

"Since there is no coronavirus relief for IRA distributions in 2021, I understand the only way my client can avoid the 10% early withdrawal tax on that distribution is satisfy one of the exceptions to that tax."

We seem to be circling two different issues.

"Of course they wouldn't be able to spread the distribution over three (3) years."

Yes, you can spread the reporting of a Disaster Distribution over three years.

No, there is no covid disaster in 2021.

Yes, there are quite a few exceptions to the Early Withdrawal penalty. These are not the same as Declared Disasters.

You simply need to use the 1099-R worksheet, and the tax return, and fill in what applies for this person. For instance, if your taxpayer is already over 59 1/2, you will not see an Early withdrawal penalty at all.

[wethepeople]

They are both under 591/2.

I have completed Form 5329 with code 05 included which is an exception to the 10% early withdrawal penalty as the amount the spouse paid from her paychecks and other out-of-pocket expenses paid by both of them met the Medical exception which states the following:

amount of unreimbursed medical expenses must be greater than 10% of AGI..

Thus the 10% tax is eliminated.

[qbteachmt]

"They are both under 591/2."

Does not matter if both are under 59 1/2. Only the Spouse is under consideration. What matters, for retirement accounts, is the individual Owner of that account, the person Named on the 1099-R. It's not a tax form issue. It's a Retirement Account event. MFJ doesn't matter. Person, matters.

[wethepeople]

I understand that that in order to meet the exception to 10% early withdrawal tax the unreimbursed medical expenses are those of both taxpayer and spouse as they must be greater than 10% of AGI.

I trust that means their joint AGI.

[qbteachmt]

"I trust that means their joint AGI"

AGI on the form your taxpayer (the person who got issued a 1099-R as they had a qualifying event in their retirement account).

I'm just clarifying that Retirement account(s) and plan(s) are Individual; not Joint. You are trying to process that person's events.

[wethepeople]

So only her portion of their total medical expenses would apply. For example, since she pays for the health insurance (including dental) for both of them then that would qualify in meeting the greater than 10% of her portion of the AGI reported on the joint return, but if he buys eyeglasses that would not..

The largest medical expense is the health and dental insurance.

[qbteachmt]

"So only her portion of their total medical expenses would apply"

No, that's what I am trying to clarify.

You told us the tax return is Joint, but the Account is individual. Things fall where they fall, and Retirement events are Individual, because the account is Individually Owned by that person.

Let's try this one: If the Taxpayer is over 72, and has no retirement account, and the Spouse is not yet 72 and has one or more retirement accounts, the Spouse does not have to take RMD. See how this is Individual, even if MFJ?

[dkh]

@wethepeople  if this is a MFJ return - any medical expenses paid for taxpayer and spouse can be used in the calculation for waiver of 10% penalty.  Doesn't matter if it was a distribution from taxpayer account. Doesn't matter if it was a distribution from spouse account. 

[wethepeople]

So if their combined medical expense (mostly health/dental paid by the spouse) is greater than 10% of their combined AGI, they qualify for the Medical exception and eliminate the 10% early withdrawal penalty on the spouse's IRA by completing Form 5329 and inserting code 05 on Line 2 of that form.

Correct?

[qbteachmt]

I wonder if you need to force an Update of ProSeries. Form 5329 instructions:

"05

Qualified retirement plan distributions up to the amount you paid for unreimbursed medical expenses during the year minus 7.5% of your adjusted gross income (AGI) for the year."

"President Trump’s Tax Cuts and Jobs Act allowed taxpayers in 2017 and 2018 to deduct the total amount of medical expenses that exceed 7.5% of their adjusted gross income (AGI). This threshold was originally scheduled to go up to 10% of AGI in 2019, but the 7.5% of AGI has been extended to tax year 2021."

[dkh]

When I have this situation, I complete the return including entering total allowable medical expenses on Schedule A.  Then I use Schedule A line 4 for the amount allowable for the 10% penalty waiver. 

[wethepeople]

If the percentage is 7.5% instead of 10% then it would be easier to qualify for the Medical exception to the 10 % tax.

[wethepeople]

That would mean that most of their medical expenses would be eliminated due to the 7.5% calculation on Line 3 of Schedule A.

It all depends on how you determine unreimbursed medical expenses.

I am using the amount on Line 1, a much larger amount.

[dkh]

I believe the waiver is only for the amount of medical expenses that exceeds the 7.5% AGI.   Check instructions for F5329

[dkh]

Read  Page 4 of F5329 instructions   https://www.irs.gov/pub/irs-pdf/i5329.pdf

[qbteachmt]

"If the percentage is 7.5% instead of 10% then it would be easier to qualify for the Medical exception to the 10 % tax."

That's why I questioned it..Twice, now. It's a lower bar to meet.

[wethepeople]

By using line 4 of Schedule A, the exception would be lost as the 7.5% of AGI requirement would eliminate most of the deductible medical expenses and thus prevent my client from eliminating the 10% early IRA withdrawal tax.

It also contributes greatly to preventing client from itemizing deductions as standard deduction is much higher.

[dkh]

So in other words, the client cannot take the 10% penalty waiver because they don't have medical expenses that qualify per the instructions for Form 5329.      Client doesn't have to itemize to use Sch A line 4 for F5329.  

[wethepeople]

When the 7.5% of medical payments is subtracted on line 3 of Schedule A they do not have enough itemized deductions to exceed the standard deduction.

Using the amount on Line 4 of Schedule A (which is after the 7.5% is applied).they do not meet the requirement that the amount of unreimbursed medical expenses be greater than 10% of AGI or even 7.5% of AGI.

Thus 10% penalty is charged.

[dkh]

Let's walk through this...return is completed including entering total allowable medical expenses on Sched A line 1. Doesn't matter if the client will be able to itemize - just need that amount entered to determine what medical expenses exceed the 7.5% of AGI which will be on Sched A line 4.   You will use the amount on line 4 for the Form 5329 amount to be excluded from 10% penalty.       Done.

If line 4 is zero then the client doesn't have any medical expenses that will reduce F5329 penalty.  This is completely possible even if your client had a large amount medical expenses but also has a very high AGI.     . 

None of the above has anything to do with the client itemizing or using standard deduction.  You are simply using Sched A Line 1-4 to do the math for the amount of medical expenses that exceeds the 7.5% AGI.   Or you can do the math without using Sched A but why not let the computer do the math for.

[qbteachmt]

"Client doesn't have to itemize to use Sch A line 4 for F5329."

Great point made.

[wethepeople]

I guess that sums things up for the 2021 tax return.

Since there is no coronavirus relief for early IRA withdrawals in 2021 and client does not meet the medical exception to tax, the penalty applies.

Thanks for all your help in resolving this issue.

[qbteachmt]

It's been interesting, so Thanks.