RETIREMENT INCOME Pub 4012 Tab D Pub 17 Chapter 10 Pub 590 Instructions Tax-Aide Scope Manual 1
TYPES OF RETIREMENT INCOME IRAs Pensions & Annuities Social Security 2
FORM 1099-R 3
NEW: 1099-R HAS INVALID SSN? Pub 4012, pg 6 Cannot e-file a return with an incorrect SSN on Form 1099-R If client has ITIN and 1099-R has invalid SSN, must file a paper return 4
MISSING 1099-R? First clients need to try to get the 1099- R from the payer or the IRS (if the payer has filed it with them) If unsuccessful, can complete the return with Form 4852 if have sufficient information Warn client: If 1099-R received later with different information they may need to amend their return 5
RETIREMENT INCOME SCOPE 4012, pg 16 and D-20 & 21 TAX-AIDE SCOPE MANUAL During the interview, review the Intake Sheet, and any Form 1099-R(s) Look at 1099-R, Box 7: Codes that are in or out-of-scope are listed in Pub 4012 and the Tax-Aide Scope Manual Note that codes 6 and W are in scope for Tax- Aide (training is provided within these slides) 6
RETIREMENT INCOME BASICS A portion of retirement income is often tax-exempt After-tax contributions to a plan = TP cost basis Distributions are a return of money that has already been taxed Before-tax contributions to a plan were made from income that was not taxed, so taxed when distributed Includes employer s pension contributions 7
IRA BASICS Generally: Get a tax deduction for traditional, MyRA, SIMPLE and SEP contributions And the distributions are taxable Do not get a deduction for Roth contributions And the distributions are not taxable 8
IRA BASICS (continued) Pub 17 Ch 17 Early distribution = before 59 ½ Incurs 10% tax penalty unless an exception applies Early distribution penalty exceptions are addressed later, in Other Taxes slides Rollovers are different 9
IRA BASICS (continued) Pub 17 Ch 17 and Pub 4012, D-20 & D-21 Rollover = moving funds from one qualified plan to another Direct Rollover = the account balance (or portion of it) moved from one trustee to another Code G in box 7 = a tax-free rollover If paid to the TP and rolled over within 60 days = tax-free rollover, need to use exclusion worksheet and not rolled over within 60 days = early distribution if TP is under 59 ½, so 10% penalty (unless an exception applies) 10
IRA BASICS (continued) Pub 17 Ch 17 Excess accumulation = not taking distributions by 70½ Required Minimum Distribution (RMD) is the amount that must be taken each year Calculated by the account administrator or trustee Must start by April 1 the the year after TP turns 70½ 50% penalty (as an additional tax) on amount not taken in time Volunteers don t calculate RMD, but 11
IRA BASICS (continued) Pub 17 Ch 17 Excess accumulation (continued) If TP tells us they failed to take their RMD and has necessary documentation we can calculate the additional tax or request a waiver of it if an exception applies This is only in scope for Tax-Aide Other Taxes 4012 H-2 12
Roth IRA Pub 17 Ch 17 and Pub 4012, D-24 The contributions are not deducted, so distributions are tax-free Unless not qualified.. See flowchart at 4012, D-24 to determine Usually see code J or T on the 1099-R If not tax-free, out-of-scope 13
TAX-AIDE SCOPE NONDEDUCTIBLE CONTRIBUTIONS Distributions from traditional IRAs/SEP/Simple are generally fully taxable.. Unless nondeductible contributions were made If this is the case, Form 8606 is required Form 8606 is considered out-of-scope by IRS training.. But is in scope for Tax-Aide if training is provided Addressed in Form 8606 slides 14
INTERVIEWING THE CLIENT Scope = the biggest challenge.. See the Intake Sheet for the retirement income question, but spend time reviewing 1099- Rs and talking to the client: Is the box 7 code in scope? Ever nondeductible contributions? Are Roth distributions fully nontaxable? Any IRA conversions? Any rollovers? If not direct, timely? Early distributions? Exceptions apply? 15
IRA DISTRIBUTIONS ON TAXWISE (continued) 4012, D-19 & D-22 If not a direct rollover, but done in a timely manner, use the exclusion worksheet at the bottom of 1099-R Explained at at 4012, D-22 Most 1099-Rs: Just enter all amounts and codes to Taxwise, check that IRA box.. Taxwise calculates nontaxable and taxable income and carries to 1040 line 15a + b as applicable 16
QUALIFIED CHARITABLE DISTRIBUTIONS Pub 590 TP directs an IRA distribution to a charitable organization and can exclude that distribution from income There are requirements, and limits Not addressed in Pub 4012: See Pub 590 There is no info on the 1099-R: TP must provide a written acknowledgment from the charity 17
QUALIFIED CHARITABLE DISTRIBUTIONS ON TAXWISE Pub 4012 pg D-20 Link to Form 1099-R from 1040 line 15 and enter all data as usual Use the 1099-R Exclusion Worksheet (below the 1099-R form entry fields) Enter the amount on line 2 Taxwise deducts the contribution from taxable income and carries taxable amount to 1040 line 15b Cannot re-use the contribution on the Schedule A! 18
1099-R EXCLUSION WORKSHEET 19
PENSION & ANNUITY BASICS Pension = payments to employee after retirement from work (employer sponsored) Annuity = payments under a contract, paid by an insurance company, trust company, etc. 20
PENSION & ANNUITY BASICS Pub 4012 D-19 to D-23, D-24, D-25 to D-26 Many different kinds of plans and several forms a TP might receive 1099-R: Most common, same form as for IRAs, for company pensions, 401(k)s, annuities RRB 1099-R: Tier 2 Railroad Benefits (Tier 1 is addressed with Social Security later) CSA 1099R: Civil Service benefits 21
RRB 1099-R (Green) 22
CSA 1099-R 0,1,2,3,4 first digit = Civil Service Retirement System (CSRS) 7, 8 first digit = Federal Employees Retirement System (FERS) 23
PENSION & ANNUITY BASICS Pub 4012 D-19 to D-21, D-23, D-25 to D-26 If taxable portion is reported on Form 1099-R with a normal distribution code 7, pension income is easy to deal with But it can get complicated.. Pub 4012 has a lot of information to help, be familiar with these pages 24
PENSION & ANNUITY BASICS (continued) Pub 4012, D-19 & D-22 A tax-exempt portion may be indicated on Form 1099-R, box 2 But not always.. If there were employee contributions then must calculate taxexempt portion using the Simplified Method Worksheet http://aarp.bogarthome.net/annuity- Pension%20Calculator.htm The General Rule is Out-Of-Scope 25
TAX-AIDE SCOPE NEW: 1099-R Code 6 Out-of-scope per 4012, D-20 Tax free section 1035 exchanges: The taxpayer exchanged one qualified contract for another E.g., life insurance for life insurance, life insurance for qualified LTC contract, etc. For full list see Form 1099-R Instructions Rare situation Code 6 = tax-free.. So is reported at 1040 line 16a (nothing on 16b) 26
TAX-AIDE SCOPE NEW: 1099-R Code W Out-of-scope per 4012, D-21 Purchase of qualified long term care contracts under combined arrangements Annuity contract for which some of the payments are used to purchase a LTC policy Rare Code W is excludable income.. So reported at 1040 line 16a (not on 16b) 27
DISABILITY PENSION TP retires due to disability before retirement age Income reported on 1040 line 7 until minimum retirement age according to the employer plan is reached TP must tell you if they have reached the minimum retirement age Code: 3 and must check box on TW 1099-R 28
PUBLIC SAFETY OFFICER EXCLUSION Pub 4012, D-19 Up to $3,000 of pension income can be excluded if paid directly from a government pension plan for health or LTC insurance premiums Insurance for the TP, SP or dependents Amount is reported in box 5 on CSA 1099-R (just confirm it s premiums, not contributions to the plan) Or TP may have other documentation (i.e., may not be in box 5) 29
PUBLIC SAFETY OFFICER EXCLUSION (cont d) Pub 4012, D-19 Amounts >$3,000 qualify as medical expense for Schedule A 30
1099-R ENTRY VARIATIONS ON TAXWISE Pub 4012, D-26 If nothing or 0 is entered to Box 2 on Taxwise, box will become red and lines 1 and 5 of the Exclusion Worksheet will become red Do not change Box 2 to get rid of the red! Refer to the examples at 4012, D-26 for guidance May just F3 box 2, or may need to complete the Exclusion Worksheet May need further information from the TP 31
Social Security 32
RR RETIREMENT Pub 4012, D-3 Railroad Retirement Tier 1 Paid to certain railroad employees Reported on Form RRB-1099 (Blue) Same rules as Social Security and same process on Taxwise 33
Form RRB-1099 34
SOCIAL SECURITY and RRB ON TAXWISE Pub 4012, D-25 Select 1040 Wkt 1 from forms tree (or link from 1040, Line 20a) Enter any data for TP and SP in appropriate columns from Form SSA-1099 or RRB-1099 See 3 and 4 at 4012, D-25 for line by line details 35
WKT1 on TaxWise (top of the form) 36
SOCIAL SECURITY and RRB ON TAXWISE (continued) Taxwise calculates taxable and taxexempt portion of benefits, carries to 1040 lines 20a & b Explain to TP; show lower part of Wkt1 Also carries any medicare premiums to the Schedule A And any federal withholding to 1040 line 61 37
FOREIGN OLD AGE PAYMENTS Canada Pension Plan, Quebec Pension Plan and Old Age Security from Canada and Germany Per treaty: Treated as Social Security Taxpayer must provide amount in US dollars (may convert using rate from irs.gov yearly average currency exchange rates ) Process on Taxwise: Same as SS Pensions and old age payments from all other countries are Out-Of-Scope 38
LUMP-SUM SOCIAL SECURITY Benefits paid may include a lump-sum for prior years Prior year amounts show in DESCRIPTION block of Form SSA-1099 Two options available: Report whole payment as if received this year Treat the payment as if received in the prior year(s) the benefit was for 39
LUMP-SUM SOCIAL SECURITY Enter to TaxWise both ways, compare and do whichever yields lowest tax Usually reporting all as if received this year = higher tax Treating as if received in prior years may be advantageous (and TP avoids having to amend returns), but TP must provide all prior year returns 40
SAMPLE SSA-1099 WITH PRIOR YEAR BENEFITS 41
LUMP-SUM SOCIAL SECURITY ON TAXWISE To report all as received in current year Just enter as usual on Wkt1 as described previously (4012, D-25) To report as if received in prior years See step-by-step at Pub 4012, D-26 You still enter the total received to Wkt1 But then scroll down to bottom of Wkt1 and to enter the 2014 amount and for each prior year link to a Lump Sum Wkt at Amounts taxable from previous years 42
BOTTOM Wkt1 43
LUMP-SUM SOCIAL SECURITY ON TAXWISE (continued) You need a separate Lump Sum Wkt for each prior year for which benefits were paid Line 1-2 nd box: is from Form SSA-1099 Everything else on this worksheet is from the client s prior year return Note: If filed MFJ, Line 1-1 st box must include the spouse s SS or RR tier 1! 44
LUMP SUM WKT ON TAXWISE Separate WKT needed for each prior year Entry fields become red or green as you enter data Below line 7 = Taxwise calculations 45
LUMP-SUM SOCIAL SECURITY ON TAXWISE (continued) Taxwise calculates any additional tax benefits for each prior year and carries back to the bottom of Wkt1 At Wkt1 Taxwise calculates the taxable benefits using the lump-sum method If tax refund/tax due is not better using the lump-sum method, just delete all Lump Sum Wkt(s) and entries at the bottom of Wkt 1 46