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By Twila Slesnick, Ph.D., Enrolled Agent During 2020, "qualified individuals" affected by COVID-19 were permitted to withdraw up to $100,000 from an IRA or an employer plan, like a 401(k) or 403(b), without incurring penalties. Those who did withdraw funds under this provision still have to pay income tax on the distribution, but some special rules were enacted to ease the tax burden. Here's how to report the withdrawals to the IRS and figure out the taxes owed.
If you were a qualified individual (see below) and you withdrew money from your 401(k), 403(b), or IRA, you won't owe the 10% early distribution tax that would normally apply to distributions for those who are younger than 59 ½.
You will, however, need to pay income tax on the distribution (unless it was from a Roth IRA). If the distribution was from a 401(k) or 403(b) plan, the distribution was not subject to the mandatory income tax withholding that would normally apply. (And there is no mandatory income tax withholding for IRAs.) Either way, you'll pay all of the income tax for the withdrawal on your tax return.
If you're worried you'll owe a lot of tax, you can spread out the distribution over three tax returns so that you'll owe less tax. You will report one-third of the amount of the distribution as income on each of your tax returns for the years 2020, 2021, and 2022. For example, if you took a coronavirus-related distribution of $30,000 in the year 2020, you would include $10,000 as income in each of the years 2020, 2021, and 2022.
Alternatively, if you are in a very low tax bracket in 2020 (perhaps because of a COVID-related job loss or profit loss), you can make an election to include the entire coronavirus-related distribution in income in 2020 (you would report this on your 2020 tax return, which is due May 17, 2021).
For any year in which you took a coronavirus-related distribution (or "recontribution"—see below), you must file a Form 8915-E with your tax return.
A qualified individual is defined as someone:
If you choose, you are allowed to "recontribute" some or all of the coronavirus-related distribution to your retirement plan or IRA at any time during the three years after you take the distribution. If you do so, you will not owe tax on the portion you repay. This rule applies only to the original participant or owner (or a surviving spouse). (That means that nonspouse beneficiaries of inherited plans cannot repay distributions to the retirement plan, though they were permitted to take coronavirus-related distributions.)
The three-year period for recontributions begins the day after the coronavirus distribution (Day 1) and ends on the third anniversary of Day 1. So if you took a distribution from your retirement plan on June 1, 2020, the three-year period during which you can repay the withdrawal without it being taxed as income begins on June 2, 2020 and ends on June 2, 2023.
You don't have to pay back the full amount. Any amount you pay back during the three-year repayment period will reduce the amount of the income you must include for the year of the repayment.
You do have to file a new IRS form, Form 8915-E, with your tax return to report the distribution and the repayment.
EXAMPLE 1: Katrina takes a $60,000 coronavirus-related distribution from her IRA on October 19, 2020. She then recontributes the entire $60,000 to her IRA on April 1, 2021, before filing her tax return for 2020. Katrina will not report any of the coronavirus-related contribution on her tax return. However, she must file Form 8915-E with her tax return to report the distribution and the repayment.
If you recontribute part or all of a distribution after paying taxes, you may have to amend your tax returns.
EXAMPLE 2: Assume the same facts as in Example 1, except Katrina waits two years to recontribute the entire $60,000 to her IRA, on April 1, 2023. Katrina has already filed her tax returns for 2020 and 2021, and reported $20,000 (one-third of the $60,000 distribution) of income from the coronavirus-related distribution on each of those returns. Because Katrina recontributed the entire $60,000 before the due date of her 2022 tax return, she will not need to include the final $20,000 installment as income for 2022 on her 2022 tax return. She will, however, need to file a Form 8915-E with her tax return to report the recontribution.
In addition, Katrina will need to file amended returns for 2020 and 2021 and report the recontributions on Form 8915-E for those years. She will also report a reduction of $20,000 in her gross income for each of those years.
If your repayment for a year is more than the includible amount for that year, you may either carry the excess forward to another installment year, or carry it back to a previous installment year. If you carry it back, you will need to file an amended return if you have already filed your return for that year.
EXAMPLE 3: Milo takes a coronavirus-related distribution of $30,000 from his IRA on November 1, 2020, planning to include $10,000 in income in each of the years 2020, 2021 and 2022. He filed his income tax return for 2020 accordingly. But on November 10, 2021, Milo decides to recontribute $15,000 to his IRA. Milo now has two options for reporting this transaction:
Option 1: Milo could report zero income from the coronavirus-related distribution in 2021 because he paid back more than the $10,000 of income that he claimed in 2021. He still has an excess recontribution of $5,000, which he may carry forward to tax year 2022. He would then reduce his next installment of $10,000 by the excess recontribution amount ($10,000 - $5,000) and report only $5,000 of income from the coronavirus-related distribution in 2022.
Option 2: Alternatively, Milo could choose to carry the excess contribution back to the year 2020. If he chooses that option, Milo would file an amended tax return for the year 2020, reducing the amount of his income attributable to the coronavirus-related distribution by the excess recontribution amount ($10,000 - $5,000). He would report income from the coronavirus-related distribution in the amount of $5,000. Milo would then report zero income from the coronavirus-related distribution for tax year 2021.
If you were to die before you have a chance to include all of your coronavirus-related distribution in your income (for up to three tax returns), and pay taxes on it, the remaining amount would have to be reported as income on the tax return for the year of your death.