Question: A client took a $60,000 coronavirus-related distribution and the institution withheld 20%, or $12,000, for federal income taxes. The client will report the payment on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, where they will pay tax on the distribution ratably over three years. Can the withholding be spread over three years as well?
Answer: No, the withholding cannot be spread over the three years. However, for clients who routinely have refunds because of excess withholding on their income sources, the tax professional could encourage them to elect to apply two-thirds of the withholding or $8,000, in this case, to their 2021 estimated taxes. Then on the 2021 tax return, the taxpayer could elect to apply the remaining one-third of the withholding or $4,000, in this case, to their 2022 estimated taxes. This strategy only works for taxpayers with withholding that covers the tax liability from all other sources.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
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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.