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NJ 401K Covid Distribution Repayment

BeckerMgt
Level 2

A client took a $75,000 distribution from their 401K that qualified as Covid disaster relief. They paid back $25,000 before the end of the year. Because only 1/3 is taxable in the first year and they paid that 1/3 back they owe no federal tax on it. The full $75,000 is showing as taxable on their NJ return. Dos NJ not let you deduct the $25,000 which was repaid? 

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13 Replies 13
qbteachmt
Level 15

I'm not sure you have the math correct. Taking $75k, returning $25k, means there is $50k to either report in the first year or spread over three years.

From the 8915-E instructions: "Include on 2020 Form 8915-E any
repayments you make before filing your 2020
return. Any repayments you make will reduce
the amount of qualified 2020 disaster
distributions reported on your return for
2020. Do not include on your 2020 Form
8915-E any repayments you make later than
the due date (including extensions) for filing
your 2020 return. If you make a repayment in
2021 after you file your 2020 return, the
repayment will reduce the amount of your
qualified 2020 disaster distributions included
in income on your 2021 return if you have
spread the income over 3 years, unless you
are eligible to amend your 2020 return."

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BeckerMgt
Level 2

I didn't do the math, the way I described it is how ProSeries is handling it on the 8915. 1/3 of the tax is due each year. They paid back 1/3 in the first year, which is what would've been taxable, so there are no taxes due in the first year. That is how ProSeries is calculating it on the 8915 and that sounds correct to me. So my question is then on the NJ return. If someone takes a 401k distribution but then immediately pays a  portion of it back is the payback amount tax-exempt to NJ and where do I report that on the NJ-1040?      

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qbteachmt
Level 15

"They paid back 1/3 in the first year, which is what would've been taxable, so there are no taxes due in the first year."

But you didn't already submit for 2020 taxes, then repay and amend 2020.

"If someone takes a 401k distribution but then immediately pays a portion of it back is the payback amount tax-exempt to NJ and where do I report that on the NJ-1040?"

NJ doesn't tax rollovers:

"If you roll over a lump-sum distribution from an IRA or a qualified
employee pension or annuity plan into an IRA or other
eligible plan, do not report the rollover on line 20a or 20b if
it qualifies for deferral for federal tax purposes."

Let's understand that a covid disaster distribution was qualified as able to be rolled over and would be treated as if that was trusee-to-trustee and given three years.

So the Math is Net. Net reportable.

That's why each repayment means you file Amended for the year affected where what should be reported is now changed, because there is a three-year "rollover" equivalent treatment.

If you pay it all back in 2020, there is nothing to report. If you pay some of it back in 2020, the rest carries to the three year treatment. If you repay some in 2021, you can amend 2020 to show the Net taxable has changed. If you repay it all by 2022, you amend 2020 and 2021, because now, none of it is taxable, as if it never happened, as a lookback function. If you repay none in 2020, there is tax on that third. If you repay some in 2021, but not any further amount, you would amend 2020 and also file for how it impacts the amount carried into 2021, and then the final amount is taxable in 2022.

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BeckerMgt
Level 2

Thanks for your clarification on the NJ rule comparing this to a rollover. I don't see on the NJ1040 where to enter the rollover portion so I suppose I'll just override the amount and enter a note with an explanation.

How you are describing the Federal handling of the 1/3 is not at all how form 8915 is setup and not at all how ProSeries is handling it. On the 8915 line 9 breaks out 1/3 of the total distribution as taxable. Line 10 asks for the repayment amount. Line 11 subtracts 10 from 9 and is the 2020 taxable amount. Since lines 9 and 10 are equal on my return there is no tax due. Since the repayment was made in the same year no amended return will need to be filed. 

If they had not made the repayment in 2020 they would owe 1/3 of the tax. If they repaid 2/3 in 2021 they wouldn't owe tax for the 1/3 in 2021 and they could file an amended return for 2020 to get those 1/3 taxes refunded.       

 

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qbteachmt
Level 15

I guess this is the issue, then: "Dos NJ not let you deduct the $25,000 which was repaid?"

Because it should be treating it as a rollover. But I'm not current on NJ nonconformity.

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tdm112
Level 1

Experiencing the same issue as described here.  If anyone is able to determine how to code the NJ 1040 properly so the distribution is not counted as income (if contributed back) , that will be helpful.  

berngrey
Level 1

And for CRD's that were fully repaid in 2020, is there a fix/will there be a fix for NJ 1040 on Turbotax?

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Michelle7
Level 1

NJ announced on April 16, 2021 that they will recognize CRD (coronavirus -related distributions) as tax-free rollover but Proseries doesn't seem to have anywhere to indicate that.  Will there be an update to Proseries for this change?

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jmcnichol
Level 1

This is what I came in search of.  How do we find out when/if ProSeries will update that NJ is now in conformity with the IRS on spreading the tax over three years.  The clock is ticking.

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qbteachmt
Level 15

@berngrey 

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support.

Thanks.

 

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Bjakey
Level 1

Hi. Just curious. How did you handle the repayment in NJ and not count the amount as income? I cannot figure it out for NJ. Thanks. 

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Bjakey
Level 1

Hi. How did you handle so the entire distribution was not counted as income for NJ tax return?  Thanks. 

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Michelle7
Level 1

I ended up checking the box to make the distribution from the Federal nontaxable.  Then I added a new entry (only in NJ) and input the correct amount as taxable to NJ.

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