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I am working on a clien't return and noticed that they had 2…

I am working on a...
I am working on a clien't return and noticed that they had 2 jobs and over contributed to their 401K by $12K.If they get in touch with their plan administrator and they can pull the money out before 4/17/18 then do I just add the excess contribution to their box 1 wages or do they need to get an amended W-2 or both?What if the money is not pulled out? Do I need to do anything, or will they just be penalized next year?
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Answered in 1 hour by:
3/27/2018
Carter McBride
Carter McBride, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,269
Experience: Adjunct Professor
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Hey! I'm Carter, I'm a CPA and can help you out.

Yes, he can pull the money out by 4/17 and everything would be file. No amended returns would be needed. He would get the income included in his 2018 W-2.

They should get it returned. If they do not, they'll be taxed on that income twice. Once when they put it in and then again when they take it out. So I would recommend pulling it out.

Let me know if you need anything else. If not, please leave a rating. Thanks!

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Customer reply replied 3 months ago
You say they’ll be taxed once when they put it on but the 2017 return right now is showing the taxable wages the same as the w-2s so it is allowing the extra deduction.If they don’t do anything then what happens. The 2017 return is currently allowing the deduction so how would they be taxed twice
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,619
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi Michael - Lane here - bear with me sec and I'll go over this. I have a different answer

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First lets be sure they're over the cap ... the 18000 salary deferral cap (24000 for those over 50) IS across all plans - some of the other limits are not (such as profit sharing contributions)

...

The taxpayer simply needs to get the money out before filing. It will only be taxed once, as income when it's eventually withdrawn or returned to the client, even if that's later this year. (on the 2018 return)

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And in the event it isn't removed by April 15 here's what IRS says:

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Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee’s cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan

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The taxpayer should ask the second administrator to make a "corrective distribution." The client will get a 1099-R for 2018 for the amount distributed, and there is no 10% penalty on a corrective distribution.

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You file the W-2's as they are. IRS will see the corrective distribution.

...

I manage over 50MM in qualified plans. This happens, and is not uncommon.

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Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars on your screen, and then clicking “submit")

That’s the only way JustAnswer.com will credit me for the work.

But as always, let me know if you need more here,

Lane

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Customer reply replied 3 months ago
if not removed how is it taxable in year of deferral if it is not included in W-2 wages on the w-2?

It's not

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it's deferred in 2017 and taxed when coming back out in 2018 (that answer above was way out in left field)... And If IRS sees that the corrective distribution was made before Apr 15, there's no 6% excise tax

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Good catch - other questions on this?

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Customer reply replied 3 months ago
Is this something that the irs automatically catches if it not reversed?

Yes, see this ... the business about being taxed twice happens when the amount is left in PAST april 15 of the following year.

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If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).

Excess withdrawn by April 15. If the employee withdraws the excess deferral by April 15, the withdrawn amount is not reported again as part of the employee’s gross income for the year. Any income earned on the withdrawal is reported as gross income for the tax year in which it is withdrawn. The distribution is not subject to the additional 10% tax on early distributions.

Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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