• Form 5329 is used for the assessing various additional taxes. The most common is for early withdrawal from IRAs and other tax-favored accounts.
  • If additional tax is assessed, it appears on both Form 5329 (on the PDF for the return) and Schedule 2 Line 8.
    • If no exception applies to the penalties automatically calculated by TaxSlayer, then Form 5329 doesn’t need to be included in the return.

5329 Part I – Additional Tax on Early Distributions 

  • An “early distribution” means one taken before age 59½.
  • TaxSlayer assesses the federal 10% penalty if there is a code 1 or code J in box 7 of a Form 1099-R. The surtax is 25% in the case of a SIMPLE early distribution – code S in box 7 of the Form 1099-R.
    • While code J is potentially subject to the penalty, if it was determined to be in-scope per the chart on Pub 4012 page D-51, then it isn’t subject to the 10% additional tax.
    • Note for CA returns:  CA also assesses a 2.5% additional tax on Form 3805P, on line 63 of Form 540.
  • Any penalty can be eliminated if the taxpayer qualifies for an exception, entered on Part I of the Form 5329 page. The process for doing this is discussed in the section 1099-R Form – Exceptions to the Additional Tax on Early Distributions, page 38.

5329 Parts II through VIII - Out-of-scope

  • If the taxpayer received a Form 1099-QA, Distribution from ABLE Accounts, determine if the distribution was fully spent on qualified expenses – for the designated beneficiary’s blindness or disability, in maintaining or improving his or her health, independence, or quality of life.
    • If so, the return is in-scope; the distribution is not reportable as income and isn’t entered in TaxSlayer.
      • Qualified expenses paid from an ABLE account can’t be used elsewhere on the tax return.
    • If not, Part II of Form 5329 needs to be filled out, which makes the return out-of-scope.

5329 Part IX – RMD Not Taken 

  • If an RMD was taken in the tax year and then redeposited – a rollover – see the section 1099-R Form – Transfer or Rollover, page 39).  If the taxpayer reached age 73 by December 31, 2022, the taxpayer should have begun taking withdrawals from tax-deferred retirement accounts, such as regular IRAs. If the taxpayer failed to take their required minimum distribution (RMD) during the tax year, they might be liable for the excess accumulation surtax (this penalty was reduced to 25% for 2023 onward), computed in Part IX.
    • For such taxpayers, there were two exceptions to the withdrawal requirement:
      • The taxpayer could have elected to defer taking the RMD in the year in which they reach age 73. In that case, the taxpayer must essentially do two RMD withdrawals in the following year.
      • If the taxpayer was still working for an organization, the taxpayer was not required to make withdrawals from that organization’s 401(k) or 403(b) plans, regardless of age, if they still participated in the plan, and if the organization’s plan so allowed. 
  • The RMD amount is shown in box 12b of Form 5498, which the IRA administrator (such as a bank) should have sent to the taxpayer. 
    • Note: While this form is not required in order to do a tax return, it may be necessary to ask the taxpayer to return with it if taxpayer was 73 years old, or older, in the tax year, and has one or more qualified retirement accounts, and has made no withdrawals, or very limited withdrawals, during the tax year. 
  • The RMD must be calculated separately for each IRA that the taxpayer owns, but the taxpayer can withdraw the total amount from any one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.
    • However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, have to be taken separately from each of those plan accounts. 
  • SEP and SIMPLE IRAs are included in these calculations; Roth IRAs are not. 
  • RMD information, including the exact percentage of December 31 balances required to be distributed to meet RMD rules, can be found at irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf.
  • If the taxpayer has failed to take a required distribution, they need to correct the problem by taking the required distribution as soon as possible, which means taking two distributions during the year in which the correcting distribution is taken.
  • To report a RMD which has not been taken, go to the Part IX of the Form 5329 page [Federal Section > Other Taxes > Tax on Early Distribution]
    • Enter the RMD amount in the box for “Minimum required distribution for current year”
      • If the taxpayer has more than one retirement account subject to RMD, calculate the total of all RMDs
    • Enter total distributions in the box for “Amount actually distributed to you in current year”
      • If the taxpayer had distributions (on a Form 1099-R) from more than one retirement account, calculate and enter the total of all RMD amounts
  • On the Form 5329 page, a waiver of the entire 25% surtax may be requested. To do so:
    • Check the box labeled “Check here to claim a waiver ... “
    • Enter the amount for which a waiver is being requested.
    • Provide the IRS with an explanation. 
      • A waiver request requires describing the circumstances that led to the failure and how the shortfall has been remedied (by taking the required distribution, belatedly)
      • Remediation must be done; the IRS may ask for proof the required distribution was done before approving the waiver. Ideally, remediation is done before the return is filed, but if that would delay the return beyond the April filing deadline, don’t wait for remediation before filing the return.
      • Once remediation is done, even if the IRS denies the waiver request (because it deems there was no extenuating circumstances for failure to take the RMD), the penalty is only 10% of the RMD not taken.
    • There are two recommended ways to get the explanation to the IRS, both involving the 70-character field which (after the box is checked) is at the bottom of the Form 5329 page:
      • Use the 70-character field to make the explanation (70 characters is roughly 14 words) 
      • Or, in the field, write “See separate explanation, attached”, then put the information in one or more Preparer Notes; each note can have up to 1000 characters of information, and is sent to the IRS with the e-filed return.
        • Go to the Preparer Note page [Miscellaneous Forms > Explanations > ...] 
    • Form 5329 is one of ten for which a PDF can be created from a menu within the return.

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