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I received a letter form the IRS stating I owe money based…

I received a letter...

I received a letter form the IRS stating I owe money based on an incorrect tax return in 2015. my now wife received money in her divorce through a 401k account. A 20% tax was withheld at the time. Why would I owe more in taxes on that money?

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Answered in 5 minutes by:
6/27/2017
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,220
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

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If you filed a joint return, even if tax was withheld, the 401k distribution to your wife is still required to be included on the return. Just like a W2 for wages, the 1099R shows a distribution and tax withheld.
The tax withheld is shown as a payment on the return.
Mark that you disagree with the notice and amend your return showing the 1099R income and the tax withheld (this as a payment).

The IRS assessment may not report the taxes withheld so it is important to include that information.

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Please let me know if you need more information.
If not then scroll up to see the STARS to rate so I am credited.

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Customer reply replied 1 year ago
On the statement they sent me, it shows a total owed minus the taxes withdrawn for payment from Fidelity investments. I owe the balance. I'm just curious of why I would owe more if Fidelity already deducted the 20% and paid it.

They deducted only 20% the distribution is added to your total income so it is likely that the 20% was enough to cover the additional amount for your total income.

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There is no special tax rate for 401k distributions. The amount is just added to your other income and then that could push you into a higher tax bracket.

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I hope that helped to clarify.

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Customer reply replied 1 year ago
Ok that makes sense. So would it have helped if I filed separately instead of jointly since my income is much higher?

It might have but you would have had to actually prepare the return both ways to know for sure. That is something you should do every year (check for joint or separate).

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,220
Experience: 15years with H & R Block. Divisional leader, Instructor
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PDtax, Owner
Category: Tax
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Remember, if you file a separate return from your spouse, you are automatically disqualified from several of the tax deductions and credits so check each year.

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Customer reply replied 1 year ago
is it better to accept the changes and pay the balance or should I decline and amend the return?

Do an amended return to make sure the IRS is correct in their assessment. If it is then sign and pay but you can request they abate any penalty based on FIRST TIME request and this was an honest mistake. That would reduce your balance.

Pay the tax and the interest but not the penalty. Wait for them to respond

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Customer reply replied 1 year ago
Thank you! You have been very helpful. Have a great day!

You are most welcome. I was happy to assist.

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