Retirement Plans and Social Security

Transcription

1 Retirement Plans and Social Security Session 10 CORRECTED (if checked) PAYER S name, street address, city, state, and ZIP code 1 Gross distribution PAYER S federal identification number RECIPIENT S name Street address (including apt. no.) City, state, and ZIP code 10 Amount allocable to IRR within 5 years Account number (see instructions) Form 1099-R RECIPIENT S identification number 11 1st year of desig. Roth contrib. 2a Taxable amount 2b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution code(s) IRA/ SEP/ SIMPLE OMB No Form 1099-R Total distribution 4 Federal income tax withheld 6 Net unrealized appreciation in employer s securities 8 Other % 9a Your percentage of total 9b Total employee contributions distribution % 12 State tax withheld 15 Local tax withheld Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. This information is being furnished to the Internal Revenue Service. 13 State/Payer s state no. 14 State distribution 16 Name of locality 17 Local distribution Department of the Treasury - Internal Revenue Service Basic Income Tax Retirement Plans and Social Security 10-1

2 10-2 Retirement Plans and Social Security Basic Income Tax

3 Contents Lesson I: Pension and Annuity Payments Form 1099-R Other Forms 1099-R Form CSA 1099R Form CSF 1099R Form RRB-1099-R Loans Rollovers Reporting Retirement Distributions Rollover Reporting Disability Distribution Reporting Lesson II: Early Distributions Additional Tax Exceptions Additional Tax Reporting Lesson III: Social Security Benefits Form SSA Social Security Equivalent Benefi ts Calculating Taxable Social Security Benefi ts Reporting Social Security Benefi ts Session 10 Summary Session 10 Homework Session 10 Knowledge Check Answers Basic Income Tax Retirement Plans and Social Security 10-3

4 10-4 Retirement Plans and Social Security Basic Income Tax

5 Introduction Objectives When presented with the tax implications of retirement plans, most taxpayers have more questions than answers. Are their retirement contributions taxable? If they decide to withdraw funds early, is there a penalty? What about Social Security benefi ts are they taxable? If they work for the railroad system, how are their retirement benefi ts handled? In this session, we provide you with answers to these questions as we examine the IRS rules for qualifi ed retirement plans such as pensions, annuities, Social Security, and railroad retirement funds. For additional information about topics covered in this session, refer to IRS Publication 17, Your Federal Income Tax, Part Two, Income. After completing this session, you will be able to Recognize the tax consequences of pension and annuity distributions Explain the entries on Form 1099-R Report an early retirement distribution on an individual income tax return Identify and report exceptions to the 10% additional tax on early distributions Determine whether Social Security benefi ts are taxable Lesson I: Pension and Annuity Payments Retirement benefi ts are an extension of compensation arrangements made between employers and employees. For plans that qualify under specifi c IRS rules (qualifi ed employee plans), the taxes on most contributions are deferred. This means that income tax is not paid at the time funds are contributed. The tax is deferred until the funds are withdrawn, at which time they are taxable. Withdrawals from a pension plan are known as distributions. Taxpayers who have a taxdeferred qualifi ed plan and have reached age 70½ must begin receiving a required minimum distribution by April 1 of the next tax year. Basic Income Tax Retirement Plans and Social Security 10-5

6 Pension - Generally, a series of regular defi nitely determinable payments made to an individual after they attain normal retirement age. Qualified Retirement Plan - A plan for retirement funds that conform to a specifi c set of legal rules. Annuity - A contract for a series of fixed or variable payments made at regular intervals over a period of more than one full year. Pension distributions are usually made to retired employees regularly and are based on certain factors. A 401(k) plan is a common type of qualifi ed retirement plan that is funded by employees through pre-tax payroll contributions. Another type of qualifi ed employee plan is an annuity. An annuity usually has a cost basis, which is the after-tax contribution or purchase price. For a retirement plan annuity, the cost basis is the amount the employee or their employer paid that was not deducted or excluded from the employee s taxable income. Civil service annuities are benefi ts paid to retired government employees. When the employee has a basis in the annuity, not all of their distribution is taxable. Pension and annuity distributions can also be made to employees who are disabled. When made from a qualifi ed retirement plan, these distributions are treated as wages until the employee reaches the minimum age for retirement as set by their employer. This minimum age is not necessarily the same as the minimum age for receiving Social Security benefi ts. Simplified Method - The required method of calculating the taxable portion of benefi ts from a qualifi ed retirement plan with an annuity starting date after November 18, The Simplifi ed Method is the most commonly required method. It is not used for annuities from nonqualifi ed plans, annuities that started before November 19, 1996, or for taxpayers who were at least age 75 when the annuity started. For these, use the General Rule to determine the taxable portion. For details about using the General Rule, refer to IRS Publication 939, General Rule for Pensions and Annuities. In some cases, pension and annuity distributions are made to a benefi ciary after the death of the employee. Pension plans can also make nonperiodic distributions. These are distributions that do not occur on a regular basis. When a retired employee receives a payment from a qualifi ed plan and no after-tax contributions were made, the entire distribution is taxable when they receive it. This includes distributions made to disabled employees and to their benefi ciaries after the death of the employee. Annuities, however, are different. They are usually purchased wholly or in part with after-tax dollars. Distributions from an annuity in which the employee has a cost basis are only partly taxable. The payer of the annuity usually calculates the taxable portion and reports it along with the total amount paid. If the payer does not report the taxable amount of an annuity, a special calculation called the Simplifi ed Method is required to determine the taxable portion. This is a specifi c method for calculating the taxable portion of retirement benefi ts from a qualified plan. For details about using the Simplifi ed Method, refer to IRS Publication 17, Part Two Retirement Plans and Social Security Basic Income Tax

7 Knowledge Check One 1. Which is generally not a fully taxable payment? Pension payments from a qualifi ed plan to which the taxpayer made no contributions. Payments from an annuity purchased with the taxpayer s after-tax dollars. Pension payments from a qualifi ed plan in which contributions were made with tax-deferred compensation. Disability payments from a qualifi ed plan in which contributions were made with tax-deferred compensation. Form 1099-R If the taxpayer receives a distribution of 10 or more from a retirement or pension plan, the payer is required to report the payment to the taxpayer and the IRS. These retirement benefi ts are reported to the taxpayer on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profi t-sharing Plans, IRAs, Insurance Contracts, etc. This form includes information needed by the taxpayer to help determine the tax treatment of their payments. The standard Form 1099-R is used by most private pension plans and public plans that are not part of the Civil Service system. Let s look at what is reported in the more commonly used boxes on this form: Box 1 - Gross distributions made from the plan for the year. Box 2a - Amount that is taxable, if the payer was able to determine a taxable portion. If the payer is not able to make a determination, Box 2a is left blank and Box 2b, Taxable amount not determined should be checked. Box 2b - Indicates whether the payer was unable to determine the taxable amount, and whether the payments during the current year represent a total distribution of the taxpayer s account. Box 4 - Amount of federal income tax withheld. Box 7 - Distribution codes that identify the type of distribution received, according to the information the payer has. Generally, if the payer has no information about the taxpayer, distribution code 1 is entered, or the box is left blank. For more information regarding the Form 1099-R boxes, including a complete list of the applicable distribution codes for Box 7, refer to Appendix F. Note: See the Form 1099-R in Illustration One to review these boxes. Basic Income Tax Retirement Plans and Social Security 10-7

8 Early Distribution - An amount distributed from the individual s pension, annuity, or traditional IRA account before they reach age 59½. Direct Rollover - The transfer of a distribution made by the administrator of the distributing plan directly from one qualifi ed plan to another qualifi ed plan (if permitted) or traditional IRA. Common distribution codes include the following: 1 - Early distribution, no known exception 2 - Early distribution, exception applies 3 - Disability 4 - Death 7 - Normal distribution G - Direct rollover to another qualifi ed plan L - Loans treated as distributions Illustration One Nicholas Collins is retired and received the Form 1099-R shown. He has never made any after-tax contributions to his plan, so all of his distribution is now taxable. The Box 7 distribution code is 7, A which indicates a normal distribution. PAYER'S name, street address, city, state, and ZIP code JOSEPH HANSON MUTUAL 20 FORREST STREET FARMINGTON MS PAYER'S federal identification number RECIPIENT'S name NICHOLAS COLLINS Street address (including apt. no.) 219 DOVER LANE Form 1099-R RECIPIENT'S identification number City, State, and ZIP Code YOUR CITY 10 AMOUNT ALLOCABLE TO IRR WITHIN 5 YEARS Account number (see instruction YS CORRECTED (if checked) 1 Gross distribution A ZIP CODE 11 1ST YEAR OF DESIG. ROTH CONTRIB a Taxable amount b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution code(s) 7 IRA/ SEP/ SIMPLE 9a Your percentage of total OMB No Form 1099-R Total distribution 4 Federal income tax withheld 6 Net unrealized appreciation in employer's securities 8 Other % 9b Total employee contribut distribution % 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B This information is being furnished to the Internal Revenue Service. 14 STATE DISTRIBUTION Department of the Treasury - Internal Revenue Service Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. 17 LOCAL DISTRIBUTION 10-8 Retirement Plans and Social Security Basic Income Tax

9 Other Forms 1099-R Variations of Form 1099-R exist, depending on the nature of the retirement benefi ts. These include the following: Form CSA 1099R, Statement of Annuity Paid Form CSF 1099R, Statement of Survivor Annuity Paid Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board Form CSA 1099R A U.S. Civil Service annuity is a retirement benefi t that is reported to the taxpayer on Form CSA 1099R. This form reports the same information to the taxpayer as a standard Form 1099-R, but uses different titles for some of the boxes. Civil Service Annuity - Annuity benefi ts that are paid primarily under the Civil Service Retirement System or the Federal Employees Retirement System. Illustration Two Laura Reid is retired from her government job and receives a Civil Service pension. Her Form CSA 1099R is shown. PAID BY Form CSA 1099R (Rev. 1/2012) This information is being furnished to the Department of the Treasury - Internal Revenue Service OFFICE OF PERSONNEL MANAGEMENT RETIREMENT SERVICES PROGRAM P. O. BOX 45 BOYERS, PA PAYER'S Federal Identification Employee Contributions/ Designated ROTH Contributions or Insurance Premiums 7. Distribution Code(s) 7 - NONDISABILITY 9b. Total Employee Contributions Recipient's ID No. (Annuitant) PAID TO STATEMENT OF ANNUITY PAID Copy B - File with Federal tax return Account number (Retirement Claim No.) CS A LAURA REID 1440 W SALEM STREET YOUR CITY YS ZIP CODE To separate, tear on perforation State 1 State OMB No Form 1099-R Distribution From Pensions, Annuities, Retirement, or Profit- Sharing Plans, IRAs, Insurance Contracts, etc. 1. Gross distribution 2a. Taxable income Federal Income Tax Withheld State Income Tax Withheld NONE 10. State Income Tax Withheld NONE Basic Income Tax Retirement Plans and Social Security 10-9

10 Form CSF 1099R Form CSF 1099R reports Civil Service annuities paid to a survivor benefi ciary. Distribution code 4 is always used on this type of Form 1099-R. Form RRB-1099-R Taxpayers who are employed by a railroad have a separate retirement system. Under this system, employees contribute both before-tax and after-tax dollars. At retirement, distributions are split into two parts. One part is the equivalent of Social Security benefi ts, which is covered in Lesson III, and the other part is treated as a distribution from a qualifi ed retirement plan. The part that is treated as a retirement plan is a combination of employee and employer contributions, and is reported on Form RRB-1099-R. The taxable and nontaxable portions are calculated by the payer. Illustration Three Sandra Walton is retired from the railroad. She received the Form RRB-1099-R shown, reporting the part of her pension that is treated like a regular retirement plan. PAYER'S NAME, STREET ADDRESS, CITY, STATE, AND ZIP CODE UNITED STATES RAILROAD RETIREMENT BOARD 844 N RUSH ST CHICAGO IL Employee Contributions 2011 ANNUITIES OR PENSIONS BY THE RAILROAD RETIREMENT BOARD PAYER S FEDERAL IDENTIFYING NO Claim Number and Payee Code A 2. Recipient's Identification Number Recipient's Name, Street Address, City, State, and ZIP Code SANDRA WALTON N WAYSTON ST UMBERTON YS ZIP CODE 4. Contributory Amount Paid 5. Vested Dual Benefits 6. Supplemental Annuity 7. Total Gross Paid 8. Repayments 9. Federal Income Tax Withheld COPY B - REPORT THIS INCOME ON YOUR FEDERAL TAX RETURN. IF THIS FORM SHOWS FEDERAL INCOME TAX WITHHELD IN BOX 9 ATTACH THIS COPY TO YOUR RETURN. THIS INFORMATION IS BEING FURNISHED TO THE INTERNAL REVENUE SERVICE. 10. Rate of Tax 11. Country 12. Medicare Premium Total FORM RRB R Retirement Plans and Social Security Basic Income Tax

11 Loans Some pension plans allow employees to borrow money from their retirement accounts and repay the loan with interest. Loans are not considered distributions unless the taxpayer does not repay them in a timely manner. If the taxpayer is current with their payments and is still employed by the company that established the plan, then a Form 1099-R is not issued when the loan is taken out. If the taxpayer does not make the required payments, the loan may be treated as a distribution that is reported on Form 1099-R with distribution code L. Such deemed distributions are taxable. Rollovers Taxpayers can postpone tax on a distribution from a retirement plan by doing a rollover. The taxpayer needs to roll the distribution over to another qualifi ed retirement plan, including a traditional IRA, within 60 days. The amount rolled over is not included in income until the recipient plan distributes that amount to the taxpayer. Nontaxable portions of distributions can only be rolled over into certain types of qualifi ed plans. If the rollover is not to an IRA, the new plan administrator must agree to account separately for the nontaxable portion in order for it to be rolled over. Rollover - A tax-free withdrawal of cash or other assets from a qualifi ed retirement plan that is reinvested into another qualifi ed retirement plan within 60 days. Taxpayers can elect to have the administrator of their old plan transfer a distribution directly to a new plan. In this type of transfer, the taxpayer never receives the funds and it is called a direct rollover, or a trustee-to-trustee transfer. Under this option, the plan administrator does not withhold tax from the distribution and reports it on the Form 1099-R with distribution code G. If an early distribution is paid directly to the taxpayer, the plan administrator must withhold 20% for federal income tax, even if the taxpayer intends to roll it over to another qualifi ed plan. This means that the taxpayer will only receive 80% of the total distribution directly. To roll over an amount equal to the total distribution, additional funds must be supplied from another source, such as the taxpayer s personal savings. The surviving spouse of a deceased taxpayer can roll over all or part of a distribution they receive from a qualifi ed retirement plan into another qualifi ed retirement plan. The rollover rules apply to surviving spouses in the same way they would have applied to the employee. Basic Income Tax Retirement Plans and Social Security 10-11

12 If a deceased taxpayer s qualifi ed plan allows, a nonspouse benefi ciary can roll over all or part of a distribution into an IRA created specifi cally for that purpose. Nonspouse benefi ciaries must roll over their distribution using a trustee-to-trustee transfer. Beginning after September 27, 2010, a new type of rollover became available for certain 401(k) and 403(b) retirement accounts. If the account is set up to accept designated Roth contributions, the taxpayer may choose to have an in-plan Roth rollover. Beginning in tax year 2011, this same in-plan Roth rollover is available for governmental 457(b) accounts. If the taxpayer has a basis in the amount being rolled over, the previously untaxed portion is included in the taxpayer s income for the year of the rollover. A special rule is available for in-plan Roth rollovers that occurred in The amount required to be included in the taxpayer s taxable income could be split in equal amounts, with half reported in 2011 and the remaining half reported in However, the taxpayer could have chosen to have the required taxable income included on their 2010 return, rather than splitting it between the 2011 and 2012 returns. Knowledge Check Two 1. Match the payment to the appropriate form. Payments 401(k) plan payments Civil Service annuity payments Civil Service survivor annuity payments Railroad retirement benefi ts Form Form CSF 1099R Form RRB-1099-R Form CSA 1099R Form 1099-R 2. Kevin received a Form 1099-R this year from the 401(k) retirement plan maintained by his previous employer. Which of the following is true, based on Kevin s Form 1099-R shown? Only a portion of the distribution is taxable. Kevin received a check for 5,487. The distribution is fully taxable this year. The distribution was rolled over into another retirement plan Retirement Plans and Social Security Basic Income Tax

13 PAYER'S name, street address, city, state, and ZIP code RETIREMENT PLAN MANAGEMENT COMPANY a Taxable amount SAN CARLOS YS ZIP CODE PAYER'S federal identification number RECIPIENT'S name KEVIN VALENTINE Street address (including apt. no.) 5690 CARDINA STREET Form 1099-R RECIPIENT'S identification number City, State, and ZIP Code YOUR CITY 10 AMOUNT ALLOCABLE TO IRR WITHIN 5 YEARS Account number (see instruction YS CORRECTED (if checked) ZIP CODE 11 1ST YEAR OF DESIG. ROTH CONTRIB. 1 Gross distribution 2b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution code(s) IRA/ SEP/ SIMPLE G 9a Your percentage of total OMB No Form 1099-R Total distribution 4 Federal income tax withheld 6 Net unrealized appreciation in employer's securities 8 Other % 9b Total employee contribut distribution % 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY X Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B This information is being furnished to the Internal Revenue Service. 14 STATE DISTRIBUTION Department of the Treasury - Internal Revenue Service Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. 17 LOCAL DISTRIBUTION Reporting Retirement Distributions Enter taxpayer pensions or annuity distributions on Form 1040, Line 16. If the pension or annuity is fully taxable, enter the amount on Line 16b only. If the payment is only partly taxable, enter the total distribution amount on Line 16a and the taxable amount on Line 16b. Attach Form 1099-R to the return if any federal income tax is withheld. Basic Income Tax Retirement Plans and Social Security 10-13

14 Illustration Four Cheryl Ford (60) received a Form 1099-R reporting 12,000 in both Boxes 1 and 2a. The full amount of her distribution is taxable. Enter the amount of distribution on Form 1040, Line 16b, A as shown.... AI 12 y Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D if required. If not required, check here If you did not 14 Other gains or (losses). Attach Form get a W-2, see 15 a IRA distributions a b Taxable amount (see instr). 15b instructions. 16 a Pensions and annuities a b Taxable amount (see instr). 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Enclose, but do 18 Farm income or (loss). Attach Schedule F not attach, any 19 Unemployment compensation payment. Also, 20 a Social security benefits a b Taxable amount (see instr). 20b please use 21 Other income. List type and amount (see instructions) 21 Form 1040-V. 22 Add the amounts in the far right column for lines 7 through 21. This is your total income ,000 A A Rollover Reporting To report a rollover, enter the total distribution amount shown in Form 1099-R, Box 1, on Form 1040, Line 16a. Next, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount (even if zero) on Line 16b, and enter ROLLOVER next to Line 16a. If the rollover is from an account where the contributions were made with pre-tax dollars and the rollover is into a Roth style account, complete and fi le Form 8606, Nondeductible IRAs, to determine any taxable amount to be reported on Form 1040, Line 16b Retirement Plans and Social Security Basic Income Tax

15 Illustration Five Amar Mahajan (39) withdrew the balance of his retirement plan and received a check for 1,600. Ten days later, he deposited the 1,600 into another qualifi ed plan. He received the Form 1099-R shown. PAYER'S name, street address, city, state, and ZIP code ALL AMERICAN TRUST COMPANY 900 ATERFRONT DRIVE YOUR CITY YS ZIP CODE PAYER'S federal identification number RECIPIENT'S name AMAR MAHAJAN Street address (including apt. no.) N CLINTON STREET Account number (see instruction Form 1099-R RECIPIENT'S identification number City, State, and ZIP Code YOUR CITY 10 AMOUNT ALLOCABLE TO IRR WITHIN 5 YEARS YS CORRECTED (if checked) 1 Gross distribution ZIP CODE 11 1ST YEAR OF DESIG. ROTH CONTRIB. B a Taxable amount b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution IRA/ SEP/ SIMPLE OMB No Form 1099-R Total distribution X 4 Federal income tax withheld 6 Net unrealized appreciation in employer's securities 8 Other Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. code(s) This information is 1 % being furnished to the Internal 9a Your percentage of total 9b Total employee contribut Revenue Service. distribution % 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 14 STATE DISTRIBUTION 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY 17 LOCAL DISTRIBUTION Department of the Treasury - Internal Revenue Service Amar s total distribution was B 2,000. Because he rolled over 1,600, only C 400 is taxable. This information is entered on Form 1040, Lines 16a and 16b, as shown. p Income 7 Wages, salaries, tips, etc. Attach Form(s) W a Taxable interest. Attach Schedule B if required a b Tax-exempt interest. Do not include on line 8a b Attach Form(s) 9 a Ordinary dividends. Attach Schedule B if required a W-2 here. Also b Qualified dividends b attach Forms W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes R if tax 11 Alimony received Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D if required. If not required, check here.... AI Other gains or (losses). Attach Form If you did not get a W-2, see 15 a IRA distributions a b Taxable amount 15b ROLLOVER instructions. Pensions and annuities a B 16 a 2000 b Taxable amount 16b 400 C 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Enclose, but do 18 Farm income or (loss). Attach Schedule F not attach, any 19 Unemployment compensation payment. Also, a 20a b Taxable amount please use 20 Social security benefits b Form 1040-V. 21 Other income. List type and amount Combine the amounts in the far right column for lines This is your total income Basic Income Tax Retirement Plans and Social Security A

16 Disability Distribution Reporting If the taxpayer receives retirement plan distributions as a result of disability, distribution code 3 is entered in Form 1099-R, Box 7. Enter their taxable payments as wages on Form 1040, Line 7, until the taxpayer reaches the minimum retirement age established by their employer. Beginning on the day after the taxpayer reaches minimum retirement age, payments received are taxable as a pension or annuity. Enter these distributions on Form 1040, Lines 16a and 16b, as appropriate. Disability payments received from an insurance policy purchased by the taxpayer with after-tax dollars are generally nontaxable. Disability payments reported on Form 1040, Line 7, are considered earned income for many benefi ts, including the Earned Income Tax Credit (EITC). Taxpayers receiving disability payments need to know their company s minimum retirement age. Usually, they can get this information from their company s Human Resources department. Illustration Six Terrance Kastner (45) is single with no dependents. He received the Form 1099-R shown for a distribution D from his retirement plan. He had no other income. PAYER'S name, street address, city, state, and ZIP code MIDLAND MANAGEMENT 668 FINANCIAL CIRCLE YOUR CITY YS ZIP CODE PAYER'S federal identification number RECIPIENT'S name TERRANCE KASTNER Street address (including apt. no.) WANDERING CREEK ROAD Form 1099-R RECIPIENT'S identification number City, State, and ZIP Code YOUR CITY 10 AMOUNT ALLOCABLE TO IRR WITHIN 5 YEARS Account number (see instruction YS CORRECTED RECTED (if checked) 1 Gross distribution ZIP CODE 11 1ST YEAR OF DESIG. ROTH CONTRIB. D a Taxable amount b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution IRA/ SEP/ SIMPLE OMB No Form 1099-R Total distribution X 4 Federal income tax withheld 6 Net unrealized appreciation in employer's securities 8 Other Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. code(s) This information is 3 % being furnished to the Internal 9a Your percentage of total 9b Total employee contribut Revenue Service. distribution % 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 14 STATE DISTRIBUTION 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY 17 LOCAL DISTRIBUTION Department of the Treasury - Internal Revenue Service Retirement Plans and Social Security Basic Income Tax

17 The minimum retirement age for Terrance s company is 55. Because he has not reached the minimum retirement age, Terrance s es distribution is considered wages and is entered on Form 1040, Line 7. D Income 7 Wages, salaries, tips, etc. Attach Form(s) W ,423 8 a Taxable interest. Attach Schedule B if required a b Tax-exempt interest. Do not include on line 8a b Attach Form(s) 9 a Ordinary dividends. Attach Schedule B if required a W-2 here. Also b Qualified dividends b attach Forms W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes R if tax 11 Alimony received was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ Capital gain or (loss). Attach Schedule D if required. If not required, check here.... AI Other gains or (losses). Attach Form If you did not get a W-2, see 15 a IRA distributions a b Taxable amount 15b instructions. 16 a Pensions and annuities a b Taxable amount 16b 7,423 D Terrance s income is below the level that requires him to file a tax return. However, he should fi le because he is eligible for the E EITC. This would give Terrance a refund, as shown on Form 1040, Line 74a. F Payments If you have a qualifying child, attach Schedule EIC. Refund g y 62 Federal income tax withheld from Forms W-2 and estimated tax payments and amount applied from 2010 return a Earned income credit (EIC) a b Nontaxable combat pay election.. 64b Additional child tax credit. Attach Form American opportunity credit from Form 8863, line First-time homebuyer credit from Form 5405, line Amount paid with request for extension to file I2439 I8839 I8801 I 69 Excess social security and tier 1 RRTA tax withheld Credit for federal tax on fuels. Attach Form Credits from Form: a b c d E. 464 Add lines 62, 63, 64a, and 65 through 71. These are your total payments A.. AI 73 If line 72 is more than line 61, subtract line 61 from line 72. This is the amount you overpaid a Amount of line 73 you want refunded to you. If Form 8888 is attached, check here... 74a 72 F Basic Income Tax Retirement Plans and Social Security 10-17

18 Knowledge Check Three 1. Which of the following require an entry on Form 1040, on both Lines 16a and 16b? Distributions from an IRA Fully taxable disability benefi ts Partly taxable pension plan distributions Fully taxable pension plan distributions 2. Which of the following requires an entry on Form 1040, Line 7? Direct rollovers Taxable disability benefi ts, when the taxpayer is less than the minimum retirement age Partly taxable pension plan distributions Fully taxable pension plan distributions Lesson II: Early Distributions Most distributions from retirement plans that are made before the taxpayer reaches age 59½ are considered early distributions. To discourage the use of pension funds for purposes other than normal retirement, an additional 10% tax is imposed on these early distributions. This additional tax applies to any part of the distribution that must be included in the taxpayer s gross income. The nontaxable part of the distribution is not subject to the additional tax, including any amount they rolled over into another plan Retirement Plans and Social Security Basic Income Tax

19 Additional Tax Exceptions Under special circumstances, early distributions from qualifi ed retirement plans are not subject to the additional 10% tax. The tax does not apply to distributions that are made As part of a series of substantially equal periodic payments over the taxpayer s life that begin after the taxpayer is separated from service Because the taxpayer is totally and permanently disabled To the taxpayer, on or after the death of the plan participant In or after the year the taxpayer reaches age 55, if they are separated from service (age 50 for qualifi ed public safety employees, such as police offi cers and fi refi ghters) To an alternate payee under a qualifi ed domestic relations order (QDRO) To the extent the taxpayer has deductible medical expenses (medical expenses that exceed 7.5% of AGI), whether or not they itemize their deductions Due to an IRS levy of the plan While serving on active duty as a reservist for more than 179 days or for an indefi nite period When the payer is aware that an exception applies, they enter distribution code 2 in Form 1099-R, Box 7. Periodic Payment or Distribution - A payment or distribution from a retirement plan that recurs on a regular basis, such as monthly or yearly. For additional exceptions that apply, including those for distributions from government plans to health insurance providers, refer to IRS Publication 17, Part Two. Knowledge Check Four 1. A retirement plan distribution made to a taxpayer who has not reached age is considered to be an early distribution, and may be subject to an additional 10% tax ½ 62½ 65 Basic Income Tax Retirement Plans and Social Security 10-19

20 2. Claudia (52) had the entire amount (10,000) from her qualifi ed retirement plan distributed to her. The plan administrator withheld the mandatory 20% (2,000) for federal income tax and gave Claudia a check for 8,000. Claudia deposited the 8,000 into a traditional IRA within 60 days. Which of the following is correct? The taxable amount of Claudia s distribution is 2,000. The taxable amount of Claudia s distribution is 10,000. Claudia does not owe the additional 10% tax on any part of her distribution. There are no taxes due as a result of these transactions. 3. Rocco (25) is the benefi ciary of his mother, Shirley s, retirement plan. When Shirley died at age 53, her plan paid Rocco the balance in her account, 98,492, all of which would have been taxable to Shirley. Which of the following applies to Rocco s distribution? The distribution is fully taxable to Rocco. Rocco must pay the 10% additional tax because Shirley was under age 59½ when she died. Rocco must pay the 10% additional tax because he is under age 59½. The distribution is not taxable to Rocco. Additional Tax Reporting If the payer knows the taxpayer is under age 59½ and does not know of any exception to the additional tax on early distributions, then they report distribution code 1 in Form 1099-R, Box 7. If this is correct, and the taxpayer is subject to the additional tax, multiply the taxable part of the distribution by 10%, enter the amount on Form 1040, Line 58, and enter No on the dotted line next to the entry. Form 5329, Additional Taxes on Qualifi ed Plans (Including IRAs) and Other Tax-Favored Accounts, is not required. Form 5329 is required in the following cases: When a Form 1099-R has distribution code 1 or is blank, but one of the exceptions applies When only part of a distribution qualifi es for an exception When the distribution code reported is incorrect Retirement Plans and Social Security Basic Income Tax

21 Illustration Seven Tonya Evans (51) lost her job and took a total distribution A from her 401(k) retirement plan. She is under age 59½, making the withdrawal an early distribution. B Her Form 1099-R is shown. Tonya also had 3,200 in unemployment benefi ts. She paid 7,000 by credit card for a hospital bill. PAYER'S name, street address, city, state, and ZIP code LANDERS RETIREMENT PLAN 5521 HIGH STREET YOUR CITY YS ZIP CODE PAYER'S federal identification number RECIPIENT'S name TONYA EVANS Street address (including apt. no.) 921 SOUTH FORK ROAD Form 1099-R RECIPIENT'S identification number City, State, and ZIP Code YOUR CITY 10 AMOUNT ALLOCABLE TO IRR WITHIN 5 YEARS Account number (see instruction YS CORRECTED (if checked) 1 Gross distribution ZIP CODE 11 1ST YEAR OF DESIG. ROTH CONTRIB. A a Taxable amount b Taxable amount not determined 3 Capital gain (included in box 2a) 5 Employee contributions /Designated Roth contributions or insurance premiums 7 Distribution code(s) IRA/ SEP/ SIMPLE B E 1 9a Your percentage of total C OMB No Form 1099-R Total distribution X 4 Federal income tax withheld 6 Net unrealized appreciation in employer's securities 8 Other % 9b Total employee contribut distribution % 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B This information is being furnished to the Internal Revenue Service. 14 STATE DISTRIBUTION Department of the Treasury - Internal Revenue Service Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. 17 LOCAL DISTRIBUTION Because Tonya is not yet 55, she does not qualify for the exception for employees who have been separated from service. She does, however, have medical expenses in excess of 7.5% of her AGI. Tonya s AGI consists of her retirement distribution (17,225) plus her unemployment benefi ts (3,200). Her excess medical expenses are calculated as follows: 20, % = 1,532 Tax returns prepared using computer software may print additional information required by the IRS for electronically fi led returns, even if the return is a paper return. For an example, see Tonya s as Form 1040, Line 62. D 7,000 1,532 = 5,468 Basic Income Tax Retirement Plans and Social Security 10-21

22 Form 5329, Part I, is used to report that an exception applies to part of her early distribution and to calculate the amount of her additional tax E to enter on Form 1040, Line 58. Her Form 5329 is completed, as shown. Form 5329 E A A OMB No Attach to Form 1040 or Form 1040NR. Department of the Treasury Attachment Internal Revenue Service (99) See separate instructions. Sequence No. Name of individual subject to additional tax. If married filing jointly, see instructions. Fill in Your Address Only If You Are Filing This Form by Itself and Not With Your Tax Return Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Home address (number and street), or P.O. box if mail is not delivered to your home City, town or post office, state, and ZIP code Your social security number TONYA EVANS If you only owe the additional 10% tax on early distributions, you may be able to report this tax directly on Form 1040, line 58, or Form 1040NR, line 56, without filing Form See the instructions for Form 1040, line 58, or for Form 1040NR, line 56. Part I Additional Tax on Early Distributions Complete this part if you took a taxable distribution before you reached age 59 1/2 from a qualified retirement plan (including an IRA) or modified endowment contract (unless you are reporting this tax directly on Form 1040 or Form 1040NR-see above). You may also have to complete this part to indicate that you qualify for an exception to the additional tax on early distributions or for certain Roth IRA distributions (see instructions). 1 Early distributions included in income. For Roth IRA distributions, see instructions Early distributions included on line 1 that are not subject to the additional tax (see instructions). Enter the appropriate exception number from the instructions: Amount subject to additional tax. Subtract line 2 from line Additional tax. Enter 10% (.10) of line 3. Include this amount on Form 1040, line 58, or Form 1040NR, line Caution: If any part of the amount on line 3 was a distribution from a SIMPLE IRA, you may have to include 25% of that amount on line 4 instead of 10% (see instructions). Apt. no. If this is an amended return, check here AI 17,225 5,468 11,757 1,176 E Refer to the Form 5329 Instructions for the exception numbers. The amount from Form 5329, Line 4, is entered on Form 1040, Line 58, E and the withholding from Form 1099-R, Box 4, is entered on Line 62, C as shown. Other Taxes Payments If you have a qualifying child, attach Schedule EIC.... I.... I 55 Subtract line 54 from line 46. If line 54 is more than line 46, enter Self-employment tax. Attach Schedule SE Unreported social security and Medicare tax from Form: a 4137 b Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required a Household employment taxes from Schedule H b First-time homebuyer credit repayment. Attach Form 5405 if required Other taxes. Enter code(s) from instructions 61 Add lines 55 through 60. This is your total tax.... D A 62 Federal income tax withheld from Forms W-2 and C estimated tax payments and amount applied from 2010 return 64 a Earned income credit (EIC) b Nontaxable combat pay election.. 64b 65 Additional child tax credit. Attach Form American opportunity credit from Form 8863, line First-time homebuyer credit from Form 5405, line Amount paid with request for extension to file Excess social security and tier 1 RRTA tax withheld Credit for federal tax on fuels. Attach Form Credits from Form: ai2439 bi8839 ci8801 di Add lines 62, 63, 64a, and 65 through 71. These are your total payments A a 59b , 1,176 E 2,390 3, Retirement Plans and Social Security Basic Income Tax

23 Knowledge Check Five 1. When must Form 5329 be fi led? The 10% additional tax applies to part of a distribution. Distribution code 1 is shown in Form 1099-R, Box 7, and no exception applies. The taxpayer receives monthly distributions for retirement, but is under age 59½. The taxpayer rolled over the entire distribution amount. 2. Edith (52) took a distribution from her qualifi ed retirement plan and used the money to take a vacation. She received a Form 1099-R showing distribution code 1 in Box 7. Which question would you not ask Edith when preparing her return? Did you still work for the company when you took the distribution? Did you roll over any of the distribution into another plan? How much did you pay in medical bills this year? Are you disabled? Partial Problem Use the information provided to prepare Sy s Form Sy Hunter ( , ), single, Army Reservist Sy s unit was called to active duty beginning in May of last year. He is still on active duty. In June, Sy took a distribution from his 401(k) retirement plan and received the Form 1099-R shown. Basic Income Tax Retirement Plans and Social Security 10-23

24 PAYER'S name, street address, city, state, and ZIP code NATIONAL RETIREMENT PLAN 3300 N LEWIS AVENUE YOUR CITY YS ZIP CODE PAYER'S federal identification number RECIPIENT'S identification number CORRECTED (if checked) 1 Gross distribution 2b Taxable amount not determined Capital gain (included in box 2a) OMB No Form 1099-R Total distribution X 4 Federal income tax withheld Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Copy B Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return RECIPIENT'S name 5 Employee contributions 6 Net unrealized SY HUNTER /Designated Roth appreciation in contributions or employer's securities insurance premiums Street address (including apt. no.) 2120 OVERVIEW TRACE IRA/ 7 Distribution SEP/ 8 Other SIMPLE City, State, and ZIP Code This information is being furnished to YOUR CITY YS ZIP CODE 1 % the Internal 9a Your percentage of total 9b Total employee contribut Revenue Service. code(s) distribution % 10 AMOUNT ALLOCABLE TO IRR 11 1ST YEAR OF DESIG. ROTH CONTRIB. 12 STATE TAX WITHHELD 13 STATE/PAYER'S STATE NO. 14 STATE DISTRIBUTION WITHIN 5 YEARS Account number (see instruction 15 LOCAL TAX WITHHELD 16 NAME OF LOCALITY 17 LOCAL DISTRIBUTION Form 1099-R Department of the Treasury - Internal Revenue Service Lesson III: Social Security Benefits Supplemental Security Income (SSI) payments are not Social Security benefi ts and are not taxable. The Social Security program provides retirement benefi ts to eligible workers who contribute funds to the program for at least 10 years. In addition, Social Security benefi ts can be paid as monthly survivor and disability benefi ts to a taxpayer s spouse and children. These benefi ts are not earned income. Form SSA-1099 Refer to Appendix M for descriptions of the boxes on Form SSA The Social Security Administration (SSA) provides each taxpayer who receives benefi ts with a Form SSA-1099, Social Security Benefi t Statement. This form includes the amount paid to the taxpayer, the years to which it applies, any amount that was repaid, and taxes withheld. If the taxpayer (and spouse, if MFJ) are required to fi le a tax return, any income reported on the Social Security Benefi t statements they receive must be reported. This is also true of any income reported on Railroad Retirement Benefi t statements Retirement Plans and Social Security Basic Income Tax

25 Illustration Eight Patsy Barnes (63) is retired and receives Social Security benefi ts. a This year, she had to repay some of the benefi ts she received in prior years. b Patsy received the Form SSA-1099 shown. Box 1. Name FORM SSA-1099 SOCIAL SECURITY BENEFIT STATEMENT 2011 PART OF YOUR SOCIAL SECURITY BENEFITS SHOWN IN BOX 5 MAY BE TAXABLE INCOME. SEE THE REVERSE FOR MORE INFORMATION. PATSY BARNES Box 2. Beneficiary's Social Security Number Box 3. Benefits Paid in 2011 Box 4. Benefits Repaid to SSA in 2011 Box 5. Net Benefits for 2011 (Box 3 minus Box 4) 9, , a DESCRIPTION OF AMOUNT IN BOX 3 DESCRIPTION OF AMOUNT IN BOX 4 b c PAID BY CHK OR DIRECT DEP 9, TOTAL ADDITIONS 9, BENEFITS FOR , NONE Box 6. Voluntary Federal Income Tax Withholding NONE Box 7. Address PATSY BARNES HOLMES ROAD YOUR CITY YS ZIP CODE Box 8. Claim Number (Use this number if you need to contact SSA.) Form SSA-1099-SM (1-2010) DO NOT RETURN THIS FORM TO SSA OR IRS Patsy s repayment of benefi ts is shown in Box 4 b and is subtracted from the gross benefi ts she received, shown in Box 3. a The net benefi ts reported in Box 5 made during the year. c refl ect all repayments that were Basic Income Tax Retirement Plans and Social Security 10-25

26 Social Security Equivalent Benefits For more information on Railroad Retirement benefi ts, refer to IRS Publication 17, Part Two, or IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefi ts. Benefi ts paid under the Railroad Retirement Act include a portion that is treated like Social Security benefi ts. The benefi ts that equal the amount a railroad employee or benefi ciary would normally have received from the SSA are commonly called the Social Security Equivalent Benefi t (SSEB) portion of tier 1 benefits. For tax purposes, these benefi ts are treated and reported in the same manner as Social Security benefi ts. They are shown on Form RRB Calculating Taxable Social Security Benefits Taxpayers who have income in addition to their Social Security benefi ts may have to include part of their benefi ts in taxable income. Up to 85% of Social Security benefi ts can be taxable. If the taxpayer is married and fi les a joint return, the taxpayer s and their spouse s income and benefi ts are combined to determine whether any of their benefi ts are taxable, even if only one receives Social Security benefi ts. A married taxpayer who fi les separately and lives with their spouse must include 85% of their Social Security benefi ts in taxable income. Some kinds of nontaxable income must also be included in modifi ed AGI, such as excluded employer adoption benefi ts and excluded foreign income. For a complete list, refer to IRS Publication 17, Part Two. Use the taxpayer s modifi ed AGI to determine whether any benefi ts are taxable. Modifi ed AGI is defi ned differently throughout the tax code, depending on the particular calculation being made. For taxable Social Security benefi t determinations, modifi ed AGI generally is the sum of all taxable income plus all tax-exempt interest income, without regard to any Social Security benefi ts. Social Security benefi ts are taxable only to the person who has the legal right to receive the benefi ts. Example: Jake and his child, Doris, receive benefi ts. The check for Doris is made out in Jake s name. Jake and Doris each receive separate Forms SSA-1099 in their names. Use only the benefi ts reported on Jake s Form SSA-1099 to determine whether any benefi ts are taxable to him. Use the amount on Doris s Form SSA-1099 to determine whether any of these benefi ts are taxable to her. Even though Jake receives a check made out in his name for Doris s benefi ts, they are still Doris s benefi ts and are taxable to her, not Jake Retirement Plans and Social Security Basic Income Tax

27 To make a quick determination about whether the taxpayer has taxable Social Security benefi ts, complete the following steps: 1. Add half of the taxpayer s Social Security benefi ts from their Form SSA-1099, Box 5, to their modified AGI. 2. Compare the amount from Step 1 to the base amount for the taxpayer s filing status from Table A. 1 Table A - Threshold Amounts for Calculating Taxable Benefits If the taxpayer s filing status is Base Amount 85% Threshold MFJ 32,000 44,000 MFS and the taxpayer lived with their spouse at any time during the year Single, HOH, QW, or MFS and did not live with their spouse at any time during the year ,000 34,000 Or you can use IRS Worksheet A, A Quick Way To Check if Your Benefi ts May Be Taxable, from IRS Publication 915. If the amount on Line E of Worksheet A is more than the base amount for their fi ling status, some of their Social Security benefi ts are taxable. How much is taxable depends on the total amount from the worksheet and the part of this amount that represents Social Security benefi ts. Generally, as the total benefi t amount increases, the taxable part also increases. Basic Income Tax Retirement Plans and Social Security 10-27

28 Up to 50% of the taxpayer s Social Security income is taxable if the income from Worksheet A is between the base amount and the 85% threshold amount. Up to 85% of the taxpayer s Social Security income is taxable if the amount is above the 85% threshold amount. Use the Social Security Benefi ts Worksheet - Lines 20a and 20b, from the Form 1040 Instructions, to calculate the taxable amount of Social Security benefi ts the taxpayer has received. Example: Roger and Betty (both 67) are married and fi ling a joint return. Both of them received Social Security benefi ts during the year. Roger s Form SSA-1099 shows net benefi ts of 6,600 in Box 5. Betty s Form SSA-1099 shows net benefi ts of 4,400 in Box 5. Roger also received a taxable pension of 24,320 2 and taxexempt interest income of Their modifi ed AGI for taxable Social Security benefi ts determination ao is 24,820 (24, ) and their total benefi ts are 11,000 4 (6, ,400), as shown in the steps that follow. These steps explain how to manually determine whether any of Roger s and Betty s benefi ts are taxable, while using Worksheet A to make the determination: 1. Add half of Roger s and Betty s Social Security benefi ts to their modifi ed AGI. (11,000 2) + 24,820 = 30, Compare the amount from Step 1 to the base amount for Roger s and Betty s fi ling status from Table A. 30,320 0 : 32, Roger and Betty Worksheet A. A Quick Way To Check if Your Benefits May Be Taxable Keep for your records A. Enter the amount from box 5 of all your Forms SSA-1099 and RRB Include the full amount of any lump-sum benefit payments received in 2011, for 2011 and earlier years. (If you received more than one form, combine the amounts from box 5 and enter the total.)...a. Note. If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. B. Enter one-half of the amount on line A...B. C. Enter your taxable pensions, wages, interest, dividends, and other taxable income... C ,000 5,500 24,320 D. Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income (listed earlier)... D. E. Add lines B, C, and D...E. Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable. You need to complete Worksheet 1, shown later. If none of your benefits are taxable, but you otherwise must file a tax return, see Benefits not taxable, later, under How To Report Your Benefits , Retirement Plans and Social Security Basic Income Tax