Question: Ethan, age 32, received a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting a $30,000 IRA distribution with Code 1 [early distribution, no known exception (in most cases, under age 59½)] in Box 7. Hailey, Ethan’s tax practitioner, questions Ethan about the distribution and learns the distribution is a coronavirus-related distribution. Hailey also confirms Ethan is a qualified individual. What form does Hailey prepare and file so Ethan’s distribution is not subject to the additional 10% tax?
Answer: Hailey will prepare and file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. The instructions to Form 5329 instruct preparers to enter exception number 12 – Other, on Line 2. This exception number is used to avoid the additional 10% tax. Hailey will also file Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, since it’s used to report qualified distributions and recontributions.
The CARES Act allows qualified individuals to treat distributions up to $100,000 made from eligible retirement plans and IRAs between Jan. 1 and Dec. 30, 2020, as coronavirus-related distributions. A coronavirus-related distribution is not subject to the 10% additional tax that applies to distributions made before an individual reaches age 59½. A coronavirus-related distribution can be included in income in equal installments over a three-year period beginning with the year the distribution is received. An individual has three years to repay the distribution to a plan or IRA and undo the tax consequences of the distribution. The three-year period is automatic unless the taxpayer elects out and includes the entire amount in income in the year of distribution.
Form 8915-E has four parts. Part I determines the total amount of cumulative qualified distributions. Part II reports qualified disaster distributions from qualified retirement plans. The box on Line 9 is checked if the taxpayer is electing out of the three-year inclusion period. Part III reports qualified disaster distributions from traditional, SEP, SIMPLE and Roth IRAs. The box on Line 17 is checked if the taxpayer is electing out of the three-year inclusion period. Part IV reports qualified distributions to purchase or construct a principal residence that was repaid, in whole or in part, prior to June 25, 2021.
Bonus question: stimulus payments
Question: My client, Irene, will file married filing separately (MFS) for 2020 for the first time. She is separated from her husband, who received the stimulus payments for both of them in his separate bank account and would not give her what should have been hers. On the 2020 return, do I say she never received either stimulus payment? How will the IRS handle this?
Answer: No. Irene must report that she received half of both joint stimulus payments when calculating her recovery rebate credit. The fact that her husband kept the money is a separate legal issue.
The IRS has a list of frequently asked questions (FAQs) regarding the recovery rebate credit on its website. The FAQs, while helpful, may not be relied upon as legal authority.
IRS Recovery Rebate Credit — Topic D: Calculating the Credit, FAQ D12 says, “When joint Economic Impact Payments are issued to two spouses, each spouse must claim half the payment when calculating the Recovery Rebate Credit. Each spouse must enter half the payment on the Recovery Rebate Credit Worksheet.”
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.