Coronavirus-related IRA distribution - 3 years taxation and repayment interaction?

[Rapid Robert]

I've been studying Sec. 2202 of the CARES Act regarding the ability to take up to $100K Coronavirus-related distribution out of an IRA without penalty, and spread the tax out over 3 years. This is similar to the same rule back in 2010, as described in IRC 408A(d)(3). This part I understand.

There is also a provision to re-contribute up to the full amount within 3 years from the date of the distribution, and treat it as a 60-day rollover.

How do these two things interact? If I take a distribution, spread it over 3 years and pay tax, and then recontribute it, does it cancel out the tax I paid previously? Is it a deduction in the year of repayment? Or does it now represent basis in my IRA?

[dtlee]

You bring up a good point.

The IRS may handle it differently by the time we get there, but my understanding (as of today 7:30 PM EDT since this stuff changes frequently) is if you take a withdrawal, have already paid taxes on the withdrawal, and then later decide to repay, you will be need to file an amended tax return to recover the taxes previously paid. Perhaps they will have a form specifically to recover that by the time we see these, but that is the only option I can see right now.

Seriously, I think we will have a lot of new forms by then. I do not know how the investment houses and the IRS (or the taxpayers themselves) will easily identify if too much was put back in. I don't think I will do this without some proof of what was distributed to whom. The good part is that all 2020 withdrawals will count so we don't have to make sure it is after some odd date in the middle of the year.

[Uncle Sam]

This is why it's vitally important that 1099-R forms have new COVID-19 penalty exception codes in Box 7 to determine the proper treatment on the tax returns otherwise it's going to be real mess

[Lion]

Think about the client that sells part of their land from their primary residence and within two years sells the rest. If they think they'll sell the rest within two years of the first sale, they can file returns to take the 121 exclusion. If they guessed wrong, amend. I think your intent will come into play the same way with IRA distributions. If you think you're going to pay it back within three years, then file that way. If wrong, amend and pay tax. We'll see when forms start coming out...