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Ask the Expert: Tax treatment of 2020 IRA required minimum distributions

My husband and I are 75 years old. We took a 2020 RMD last January. Then the federal government allowed everyone who had taken a 2020 RMD to return it to their IRAs. We did.

Let's say we took a $20,000 RMD and had 25% withheld for federal tax. The financial institution that handles our IRA said I'd have to return the full $20,000, not the $15,000 I actually received. I returned the full amount. But my statements still show I received a $20,000 RMD. This will be a problem: the 1099-R will say we received $20,000. The financial institution says my accountant will know how to handle this. How should it be handled?

Tell your tax preparer this whole story. Otherwise, he or she won't know you returned the 2020 required minimum distribution because — as you say — that information isn't on Form 1099-R, on which financial institutions report individual retirement account distributions to the Internal Revenue Service.

The tax preparer will complete a line on your federal return showing the amount distributed from your IRA — in this case, $20,000 — and the line below it, which states how much of that distribution was taxable: in this case, zero. Your tax preparer will also take credit on your return for the tax that was withheld from the RMD. The credit will reduce your total tax bill.

Eventually you'll receive a copy of Form 5498. That form shows that you rolled the RMD back into your IRA, says Ed Slott, a Rockville Centre tax accountant. But financial institutions have until May 31 to send Form 5498 to the IRS, so you probably won't receive it until after you've filed your taxes.

The bottom line

If you redeposited your 2020 RMD, make sure your tax accountant knows about it.

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