Lesson 11 Pensions and Other Retirement Income

Objectives Determine the taxable portion of different types of retirement income Determine how to report different types of retirement income on the tax return Explain when a minimum distribution is required Determine when an adjustment to withholding should be made

Intake/Interview Process Form – Intake and Interview Sheet - Income Section

Pensions and Annuities Pension Annuity Qualified Employee Plan 401(k) Plan

Taxable Portion of Retirement Income Fully Taxable No basis (employee contribution) in the plan All distributions are included in taxable income Partially Taxable Basis or cost in the plan Only the taxable portion of the distribution is included in taxable income

Determining Taxable Retirement Income The General Rule The Simplified Method −Based on total basis or cost in the plan and total anticipated monthly payments −Use Simplified Method Worksheet −Tax-free portion of each payment does not change, once computed

Reporting the Income A IRA Line Pension Line Annuity Line Social Security Line Railroad-Tier 1 Line Railroad-Tier 2 Line 16 12

Disability Pension Treat as wages until the taxpayer reaches minimum retirement age (report on line 7, Form 1040) Treat as pension income once minimum retirement age reached (report on line 16, Form 1040)

Minimum Distributions Distributions must begin by the required beginning date Must receive entire interest in the plan or minimum required distribution Excise tax (50%) imposed on amount not distributed as required

Railroad Retirement Benefits paid under two categories: Social Security Equivalent Benefits (SSEB) −Reported on Form RRB-1099 −Treat as social security benefits Non-Social Security Equivalent Benefits (NSSEB) −Reported on Form RRB-1099-R −Treat as pension benefits

Social Security Benefits and Railroad Retirement SSEB A portion of Social Security Benefits or Railroad Retirement SSEB may be taxable −Generally up to 50% −Can be up to 85%, if: income +½ of benefits exceed base amount or MFS & lived with your spouse Use the Social Security Benefits Worksheet to calculate the taxable benefits

Lump-Sum Social Security Benefit Payments Payment can be for current and prior years Do not confuse with nontaxable lump-sum death benefits Two options to figure taxable portion: −Report all in year received – complete Social Security Benefits Worksheet −Treat as received in earlier year(s) – refer to paid preparer

IRA Distributions Traditional IRA distributions may be − fully taxable or − partially taxable Roth IRA distributions are not taxed (if all requirements are met)

Traditional IRA Distributions Taxable as ordinary income in year received Reported to taxpayer on Form 1099-R Fully taxable – only deductible contributions Partially taxable – nondeductible contributions Required minimum distribution by April 1 of year following year taxpayer reaches age 70½

Roth IRA Distributions Qualified distributions are not taxable Distribution made after 5-taxable-year period after Roth was established and −Taxpayer is age 59 ½, or −Taxpayer is disabled, or − To a beneficiary/estate after taxpayer death, or −To buy, build, or rebuild a 1 st home

Pension Withholding & Estimated Tax Payments Use W-4P to adjust or change withholding on a pension or annuity Estimated tax payments may be required if: −Taxpayer has too little tax withheld −Taxpayer owes more than $1,000 in tax

Quality Review (QR) Form 8158 – Quality Review Checklist - Income Section

Lesson Summary Pension benefits are fully or partially taxable Use Simplified Method Worksheet to determine taxable portion of pension Social security benefits may be partially taxable Use Social Security Benefits Worksheet to determine taxable portion

Lesson Summary – cont’d Traditional IRA distributions may be fully taxable or partially taxable Partially taxable IRA distributions are outside the scope of VITA/TCE Qualifying Roth IRA distributions are not taxable Adjust pension withholding with Form W-4P