tax question/help needed?

Question

I filed my taxes last week and am receiving a refund of over $8000. However I received a 1099 for my 401-K that I cashed out last summer. It was $36,000. My employer withheld the 20% and I thought that was it. Now I guess I have to file an amended return. What will this do to my refund? Could I possibly owe now? I made $110,000 in 2006 filed jointly. What should I do? I am sure this will put me in a higher bracket and screw everything up. Would I difinitely be caught if I ingored it? Thanks!

Answer 1

You cant ignore it b/c the IRS already has record of your distribution and a copy of the 1099.

It's not so horrible. Youre employer withheld 20% so you should be ok. But you are also subject to a 10% penalty for the early distribution, which would be an additional $3,600 owed on top of any tax owed.

You will need to amend your tax return for this 1099.

Your overpayment of $8,000 plus the additional $7,200 withheld on the distribution will be enough to cover any additional tax and penalties. The IRS will not refund you the $8,000 b/c when they process your return they will detect the error. You wont need to make any tax payments like "bostonian" says below.

Answer 2

If you ignore it, you absolutely will be caught.

At your income level, the 20% withholding on the early distrubution is nowhere near enough to cover the tax, let alone that 10% penalty. The total bite will probably fall between 35% and 38% depending upon your other deductions and exemptions and your spouse's income.

Doing a little math (and this is just a semi-educated guess) your additional tax liability is between $12,600 and $13,680. That would be offset by the $7,200 withheld leaving a net of between $5,400 and $6,480. You'll have to file an amended return by April 17th and pay that additional tax.

Since you've already filed it's highly unlikely that your amended return will be caught before your original return is processed and the refund check is cut so you must pay that additional tax with the 1040X. At least the additional tax should be less than your refund so at least you won't have to dig into your own funds to cover it.

(Of course, this all assumes that you didn't add the withholdings from the distribution on Form 1099 to the W2 amounts on line 64 of Form 1040. If you did THAT, you'll have to pay the entire tax and penalty on the early distribution with your amended return.)