30 Mar Can I pay all taxes on COVID withdrawal after filing my return?
Q. I withdrew $75,000 from my retirement plan last year. I have since filed my 2020 taxes with the additional $25,000 of that counts for the year, plus I paid the additional taxes. I am not going to repay any portion of the $75,000. If I wanted to pay all of the taxes on the remaining $50,000, how can I do it and what form shall I use? My income will remain the same.
A. It sounds like you took advantage of the COVID-related distribution available under the CARES Act.
Under the terms of the act, which was passed in March 2020, eligible individuals could withdraw up to $100,000 penalty-free from a qualified plan such as an IRA or 401(k) plan, said Jodi Cirignano, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.
A person was eligible to take the withdrawal if they incurred a health- or financial-related hardship due to the pandemic in 2020, she said.
She said withdrawals from retirement accounts are taxable income, and withdrawals made prior to age 59 ½ are typically subject to a 10% penalty, but the CARES Act waived that.
It also allows people to spread the income and taxes over the next three years on their tax return. People were also permitted to recontribute the amount withdrawn over three years and avoid paying income taxes, she said.
You said are not paying back any portion of the withdrawal and elected to spread the income over three years, but now you want to pay the remaining taxes.
Your withdrawal would have been reported on IRS Form 8915 and filed with your 2020 tax return, she said.
“The Form 8915 instructions indicate that the tax will be spread out over three years unless you `check the box’ on Line 17, and that the election cannot be changed after the due date of your tax return, including extensions,” she said. “We suggest that you amend your 2020 tax return before the filing deadline of May 17, 2021, `check the box’ on Line 17 of Form 8915 and pay all the income taxes due on the withdrawal.”
But, she said, in many cases, deferring income and taxes can be beneficial.
“It sounds like you have a plan in mind, but we suggest that you review your estimated income and tax bracket for 2020 and the next two years to optimize your situation,” she said.
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This story was originally published on March 30, 2021.
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