Lesson 11
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Transcript of Lesson 11
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 13614 – 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
1040 1040AIRA Line 15 11Pension Line 16 12Annuity Line 16 12Social Security Line 20 14Railroad-Tier 1 Line 20 14Railroad-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 1st 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