In March 2023, I early withdrew $30,458.74 from my 401k and forgot to put it on my tax forms. I plan to amend my 2023 taxes in January 2025 with the 1099R, but on the form it says I withheld 20% for federal income tax $6,091.75 and withheld $609.18 for state tax (CA). Will I still be penalized 10% in addition to the money withheld or will I get money returned since I withheld more than the 10% penalty? Not quite sure how this works.
10% is the penalty. You still are taxed at the marginal rate.
Ezri said:
10% is the penalty. You still are taxed at the marginal rate.
Even though I withheld 20%?
Ezri said:
10% is the penalty. You still are taxed at the marginal rate.
Even though I withheld 20%?
Withholding is just an estimated prepayment. It has zero impact on what you actually owe.
@Ripley
I don’t subtract it from the total amount I owe for prepaying? So I’m taxed twice?
Rowan said:
@Ripley
I don’t subtract it from the total amount I owe for prepaying? So I’m taxed twice?
The tax and penalty is calculated based on what was withdrawn.
That gets added to your total tax for the year.
Your withholdings go towards paying that total tax. So whatever was withheld, offsets your tax bill.
You do not get taxed twice.
Rowan said:
@Ripley
I don’t subtract it from the total amount I owe for prepaying? So I’m taxed twice?
Your tax owed is the top line number. You made X income, took Y deductions/credits, and now your total tax liability is Z. You chose withholding W. Your leftover balance is B. Your Z never changes regardless of what your W is. It only changes the B. If B is negative, you get a refund. If it’s positive, that’s what you still owe.
@Ripley
I got a refund for my 2023 tax return, but I didn’t calculate my income with the amount withdrawn. On my amendment, would I put my 2023 income + amount withdrawn for X and add the 20% amount for withholding W? Where do I include the 10% federal penalty? Do I amend my state return and federal return separately? Sorry, it’s my first time amending a return.
@Rowan
You can just add 10% to your federal marginal rate on the amount of the withdrawal. If your normal marginal rate was 22% for all income, use 32% for the withdrawal amount.
Your state and federal are always different returns and require their own separate amendments because they go to separate taxing authorities.
An early distribution is subject to both regular income tax and additional taxes on early distributions. The additional taxe on early distributions is 10% for federal and 2.5% for California. For example, if your marginal federal income tax rate is 22% and California tax rate is 9.3%, then your tax liability is
- 22% + 10% = 32% on the federal return, and
- 9.3% + 2.5% = 11.8% on the California return.
In the above example, you would have an additional balance due because your withholding did not cover your entire tax liability.
@Tatum
So my total liability would be based on my marginal federal income tax rate % (which would be based on my income for 2023 + the $30,458.74 I withdrew) + (10% of $30,458.74) on the federal return? Am I understanding that correctly? What about the 20% I withheld for federal, do I subtract that amount?
So my total liability would be based on my marginal federal income tax rate % (which would be based on my income for 2023 + the $30,458.74 I withdrew) + (10% of $30,458.74) on the federal return?
Yes.
What about the 20% I withheld for federal, do I subtract that amount?
Yes, so in my above example, your balance due would be about 32% - 20% = 12% of the taxable distribution for federal.
@Rowan
You don’t subtract the withholding from the taxable distribution. You do subtract the withholding from the tax due.
@Rowan
It gets subtracted when you enter your 1099-R in your tax software. There’s a space for taxes withheld. It says it right on the 1099-R.
Casey said:
@Rowan
It gets subtracted when you enter your 1099-R in your tax software. There’s a space for taxes withheld. It says it right on the 1099-R.
I got a tax refund (money returned to me) for 2023 since I forgot to enter details of the early withdrawal. Are there sections to enter this information on the amendment form? Is my liability subtracted from the amount that was returned to me?
Edited: changed return to refund
@Rowan
Your amended return will account for the numbers you entered onto your original return.
Remember - a “return” is the document you file. A “refund” is the money refunded to you.
Did the IRS make any additional adjustments to your return after you filed? Or did you get refunded exactly what you filed for?
When you filed your return, your “total tax” was one number. When you amend, it’ll be a new number. You’ll owe the difference between the two, IF that new number is higher. Plus some late payment penalties and interest.
@Casey
Thank you for the correction. I was refunded exactly what I filed for. What is the late payment penalty for not filing my 401k withdrawal in 2023?
Rowan said:
@Casey
Thank you for the correction. I was refunded exactly what I filed for. What is the late payment penalty for not filing my 401k withdrawal in 2023?
Late payment penalty is 0.5% of the unpaid balance due for each month, plus interest, which has been at something like a 8% APR.
Probably won’t be a whole lot if your withholding gets you close to the actual tax due.
You are subject to the 10% early distribution penalty. For income tax purposes, I suggest to my clients that the distribution is added to your salary and is taxed at a higher rate. As important, I remind clients not to forget about the state tax implication and withhold accordingly.
@Koa
Do I amend the state return and federal return separately? Is it 10% of my total income or 10% of the withdrawal amount?