1099-R Form – Distributions from Retirement Accounts

  • Form 1099-R is used for two somewhat similar things: distributions from retirement accounts, and pension and annuity payments. Distributions are covered in this section; pensions and annuities (Line 5) are covered in a later section, on page 41.
    • Generally, if a Form 1099-R is distribution from a retirement account, rather than a pension or annuity payment, then the checkbox “IRA/SEP/SIMPLE” (on the paper form, the checkbox is close to box 7), will be checked. This box also will be checked for Roth IRA distributions.
      • TaxSlayer will only put income from the form onto Line 4 of Form 1040 if the checkbox is checked in TaxSlayer.
    • Annuities and pensions (discussed later) will have one of the following codes in box 7: code 3, code 4 (also used for distributions), code 6, code 7 (also used for distributions), code D, or code F. All other codes are for distributions.
  • Box 2a:
    • When an amount is entered in box 1, TaxSlayer automatically uses that to fill box 2a, with a note that the amount in box 2a can be changed. 
      • If the amount that TaxSlayer automatically enters in box 2a does match the amount in box 2a on the paper Form 1099-R, then continue down the form, dealing with other entries in TaxSlayer.
    • If the amount that TaxSlayer automatically enters in box 2a does not match box 2a on the Form 1099-R:
      • If the paper Form 1099-R has a non-zero amount in box 2a, enter that amount in TaxSlayer in box 2a.
      • If box 2a is a zero (not just blank), and in box 2b there is no checkmark for “Taxable amount not determined”, then the starting presumption should be that none of the distribution is taxable. This needs to be confirmed. Look at box 5, employee contributions. If the box 5 amount is the same as box 1, then none of the distribution is taxable, so box 2a in TaxSlayer should be changed to zero. Otherwise, discuss this with the taxpayer. 
        1. If there is not already an electronic note regarding distributions of this type for the taxpayer, add one to help counselors doing returns in future years (see page 8).
      • If 2a is blank (this is rare for distributions from retirement accounts), box 2b will normally have a checkmark for “Taxable amount not determined”. To determine taxability, look at prior year returns and discuss the matter with the taxpayer. 
        1. If there is not already an electronic note regarding distributions of this type for the taxpayer, add one to help counselors doing returns in future years (see page 8).
  • Checkbox below box 2a
    • Some distributions do not affect the calculations for the Retirement Savings Contribution Credit (page 95) – distributions that are rollovers, or are related to Roth IRAs, or otherwise should not be included – see the list on page G-19 of Pub 4012.
      • For such distributions, check the “Does not qualify for Form 8880” box to keep these distributions from affecting Form 8880 calculations. 
  • Box 5: An amount in this box, for a distribution, normally results in box 2a being the difference between box 1 and box 5.
    • If this is a Total Distribution (box 2b will be so checked), then remaining employee contribution may appear in box 5.
  • Box 7 code: Take care in entering the code on the Form 1099-R.
    • The IRS Instructions for Form 1099-R has a “Guide to Distribution Codes” which is more detailed than the table on pages D-50 and D-51 of Pub 4012.
    • If multiple codes are shown (for example, “G4”), enter both codes in TaxSlayer.
      • For issues of scope, check each code separately. 
    • Code 6 (tax-free Section 1035 exchange), code Q (Roth IRA qualified distribution), and code W (payment for a LTC contract) are not taxable; do not report on the return.
      • For forms with code W, do not claim the amount in box 1 as a medical expense on Schedule A, or as medical insurance costs for SEHI deduction, because the distribution is tax-free (box 2a is zero).
    • Code D (annuity payments from nonqualified annuities) – only the gain is taxable.  If box 2a on Form 1099-R is blank, call the issuer (payer) to get the taxable amount, if any.
    • Code G and code H are direct rollovers – see the section 1099-R Form – Transfer or Rollover on page 40.
    • Code J (early distribution from a Roth IRA) – follow the instructions on page D-51 of the NTTC version of  Pub 4012 to determine whether the Form 1099-R is in scope, and if so, how to enter it in TaxSlayer.
    • Code T is used for a distribution from a Roth IRA if the participant has reached age 59½, but the 5-year holding period may not have been met. Use the flow chart on page D-49 of Pub 4012 to determine taxability (if any of the distribution is taxable, the return is out-of-scope).
      • Note: If, after completing the TaxSlayer page for a 1099-R with code T, TaxSlayer displays the Form 8606 – Nondeductible IRAs page, the return is out-of-scope, because Part III needs to be completed, which is out-of-scope.
    • Code 1 or Code S:  after all information is entered in TaxSlayer, and “Continue” or “Save & Enter Another” is clicked, the Form 1099-R Distribution Penalty page will appear. 
      • For the question “What type of plan did you receive this distribution from”, check “Retirement Plan.”
      • For the second question, determine if there is an exception to the additional tax for early distribution (before age 59 ½).
        • See the section 1099-R Form – Exceptions to the Additional Tax on Early Distributions, page 39, for details on how to determine if the taxpayer can claim an exception to the penalty.
        • If there is an exception, check the box. [Ignore the sentence “Not sure if your withdrawal qualifies to be exempt from the penalty?”] 
        • Entering the exception code, and the exception amount, must be done separately, on the Form 5329 page, as discussed in the next section. It is best to do that immediately after finishing the Form 1099-R Distribution Penalty page.
      • Click “Continue” to finish the penalty page.
  • Box 7 checkbox: If the “IRA/SEP/SIMPLE” box is checked:
    • Confirm with the taxpayer the type of IRA (traditional or Roth) and whether it is a Roth conversion.
    • A conversion from a traditional IRA to a Roth IRA requires completing Part II of Form 8606. 
    • Distribution from a converted Roth IRA makes the return out-of-scope if any portion of the distribution is or could be taxable.
      • Note that the 5-year rule (penalty for withdrawal from a Roth IRA account within five years of opening that account) applies to each conversion.
  • Box 9b
    • If the taxpayer cashed in an annuity, they will have received a Form 1099-R with the amount they received.
    • If the investment (in box 9b; may also be in box 5) is greater than the amount shown in box 1, the net loss can be claimed as a miscellaneous itemized deduction – see Schedule A – Other Itemized Deductions (Line 16) on page 87.

Distributions from an IRA Account Where Over-Age-70½ Contributions Have Been Made

  • On the federal return, a distribution from an IRA account where over-age-70½ deductible contributions have been made is treated no differently from a distribution from an account with no such contributions.
  • CA policy: CA does not conform to federal rules with regard to such contributions (they are not a reduction of income, as discussed on page 74), and accordingly should not treat the related distributions as income, unlike on the federal return. 
    • However, it is difficult-to-impossible to determine the portion of the withdrawal involving money that California previously did not allow as a reduction of CA income. Even if adequate taxpayer or IRA custodial records are available, the allocation of the distribution almost certainly involves assumptions, complicated by trying to account for earnings or losses inside the IRA.
    • Accordingly, it is CA policy that when IRA distributions are made from an account where contributions were made after age 70 ½, there will be no CA adjustment (no reduction of income). 100% of such distributions will be treated as taxable on the CA return.
      • If the taxpayer wants to reduce the CA taxability of such an IRA distribution, the return is out-of-scope and the taxpayer should be referred to a paid preparer.

Required Minimum Distributions (RMDs) 

  • If the taxpayer (or, if a MFJ return, the spouse) with a traditional IRA was at least age 73 by December 31, 2023, then they were normally required to begin taking distributions from that IRA. 
    • If the taxpayer or spouse reached that age, and there are no Form 1099-Rs in the documents provided by the taxpayer that involve distributions, discuss whether the taxpayer or spouse has any traditional IRA accounts, and if so, their RMD options.
    • If the taxpayer does have one or more Form 1099-Rs with distributions, discuss if the total distributions meet the total RMD requirements.
    • If there is any question as to whether the taxpayer did in fact take their RMD, see section 5329 Part IX – RMD Not Taken, on page 101, which includes a discussion of how to determine RMD.

1099-R Form – Exceptions to the Additional Tax on Early Distributions 

  • TaxSlayer automatically assesses an additional tax of 10% for an early distribution (prior to age 59½) from an IRA account; early distributions are those on Form 1099-Rs with code 1 or code S in Box 7. 
    • Don’t use the taxpayer’s age as of December 31 of the tax year to determine whether a penalty applies; use the taxpayer’s actual date of birth, and the actual date of withdrawal to find the age at withdrawal.
    • Note for CA state returns: CA also assesses a 2.5% tax for early withdrawals; this shows on CA Form 3805P and on line 63 of Form 540. (California conforms to all federal exceptions to the penalty.)
  • Exceptions to the additional tax are listed in Pub 4012 page H-7.
    • For additional exceptions that apply to annuities, see Pub 575, Pension and Annuity Income.
    • Note that exceptions 07 through 09 are only for IRA distributions, not distributions from other types of qualified retirement plans.
    • For exception 08, qualified higher education expenses can include room and board. See Pub 590-B, Distributions from Individual Retirement Arrangements, for details on that and other exceptions. 
    • Beginning in 2020, an IRA owner or a participant in a workplace defined contribution plan, such as a 401(k) or 403(b) plan, can withdraw up to $5,000 for the birth or adoption of a child without incurring the usual 10% additional tax on early distributions. Pub 4012 page H-7 has details.
    • Effective for distributions after 12/29/22, there are new exceptions for distributions due to terminal illness, and for private-sector firefighters, public-safety officers (PSO) with 25 years of service, and state and local gov’t corrections officers.  Note:  This definition of PSO is different from the one for 1099-R Form – Public Safety Officer (PSO) Exceptions on page 44. See Pub 4012 page H-7 and Retirement Topic - Exceptions to Tax on Early Distributions at irs.gov. 
    • Funds from a distribution do not have to be explicitly spent on the expenses for which an exception is being claimed, but the distribution and the expenses must be in the same tax year.
      • Do not ask the taxpayer on what they spent the distribution. Rather, say “If you had certain types of expenses during the year, we could reduce or eliminate the early withdrawal penalty. Let’s review your expenses.”
  • If there is an exception to the additional tax:
    • As discussed in the section immediately above, you should have already viewed the Form 1099-R. Distribution Penalty page, and the second box should have been checked. 
    • Go to Part I of the Form 5329 page [Federal Section > Other Taxes > Tax on Early Distribution].
    • If a MFJ return, select whether you are completing this page for the taxpayer or the spouse.
    • Enter the amount that is NOT subject to that penalty in the correct box, either SIMPLE [if code S in box 7 of the Form 1099-R] or non-SIMPLE [if code 1]. 
      • Warning:  TaxSlayer does no error checking on the amount entered. Make sure the amount entered is correct.
    • Select the reason for exemption in the drop-down box.
    • Click “Continue”. 
    • On the “Other Taxes” menu page, click “Print” to create a PDF of the Form 5329, to confirm that line 4 of Part I is the expected amount, which will be zero if all distributions subject to penalty have an exception.
    • Note for CA state returns: Exception information entered in Part I of Form 5329 automatically carries to CA Form 5805P. 

1099-R Form – Transfer or Rollover 

  • A “transfer” is a DIRECT transfer of funds or securities from one qualified account to another. No money passes through the taxpayer’s hands. (This is also called a “direct rollover”.) Box 7 will have code G or code H.
    • Taxpayers can do this as often as they wish, without penalty.
    • For code G, if there is an amount in box 2a of the paper Form 1099-R, this may be a wholly or partially taxable rollover from a qualified plan to a Roth account. If the taxpayer confirms that the destination for the transfer was a Roth, enter the taxable amount shown in box 2a of the paper form. If the taxpayer is certain that the destination was a traditional IRA or a non-Roth account in another qualified retirement plan, then box 2a in TaxSlayer should be changed to zero.
    • Otherwise, for a code G or code H transfer, box 2a on the paper Form 1099-R should be blank (or zero); in this case, enter zero in box 2a in TaxSlayer.
    • Then in the “Rollover or Disability” section of the Form 1099-R page, check the box “Check here if all/part of the distribution was rolled over, and enter the rollover amount”. Then, in the dollar amount box immediately below, enter the box 1 amount as the “rollover amount” (this step shouldn’t really be required, as TaxSlayer seems to do nothing with this).
  • A “rollover” is a distribution from a qualified account to the taxpayer, followed by a deposit of some or all of the distribution to another qualified account. 
    • The deposit must occur WITHIN 60 DAYS of the distribution. 
    • Because rollovers have the same code in box 7 as regular distributions – specifically, code 1 or code 7 – the only way to know about a rollover is when the taxpayer identifies one.
    • A taxpayer is normally limited to one rollover from an IRA in any 12-month period, regardless of how many accounts there are. 
    • Rollovers are handled as follows:
      • Box 2a should be changed to the amount that was retained by the taxpayer, if any.
        • “Retained” includes money withheld as taxes. For example, if the taxpayer withdrew $5,000, had $1,000 withheld in taxes, and deposited $4,000 in a different qualified retirement account (not a Roth account), then box 2a should be $1,000.
        • If a taxpayer received a qualified retirement distribution with income tax withheld and then decided to roll over the entire distribution (getting money from another source), then box 2a would be zero.
      • In the “Rollover or Disability” section of Form 1099-R, check the box “Check here if all/part of the distribution was rolled over, and enter the rollover amount”. Then in the dollar amount line immediately below, enter the amount that the taxpayer deposited in a retirement account. (This amount plus the amount in box 2a must equal the box 1 amount.) 
      • A taxpayer is not allowed to rollover an inherited IRA unless the IRA was inherited from a spouse. 
  • Revenue Procedure 2016-47 explains a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day window for properly rolling these amounts into another retirement plan or IRA. Eligible taxpayers can qualify for a waiver of the 60-day time limit to avoid possible taxes and penalties on early distributions if they meet certain circumstances. Taxpayers who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances apply (listed in section 3.02 of the revenue procedure). More information is in the IRS document “Retirement Plans FAQs relating to Waivers of the 60-Day Rollover Requirement”.

1099-R Form – Qualified Charitable Distribution 

  • The taxpayer may have made one or more Qualified Charitable Distributions (QCD).
    • This involves the taxpayer directing a payment to go directly to a charity. Such a payment (distribution) is nontaxable, but the taxpayer doesn’t get a charitable deduction.
      • The taxpayer should have written documentation, should the IRS request more information.
    • The taxpayer must have been at least 70½ when the donation was made; the maximum donation in any single year is $100,000.
  • In box 2a, enter the total amount that the taxpayer received from the retirement account – the amount that was not charitable gifts. (This amount will normally be zero if all the distribution went to charities.)
    • However, QCD distributions are taxable to the extent that the taxpayer made deductible contributions to a traditional IRA after age 70½. For example, if payments to charities totaled $10,000 (box 1), but the taxpayer, age 71, had earned income and contributed $2,000 to a traditional IRA as a deduction (reduction of income), then box 2a in TaxSlayer should be $2,000. (The taxpayer can use the $2,000 on Schedule A if itemizing.)
      • Warning: The taxable amount in box 2a can be affected by deductible IRA contributions made in the two prior tax years – see the warning on page D-52 of Pub 4012 (NTTC-modified version only). 
  • Enter the rest of the 1099-R information as normal; click “Continue”. At the warning screen, click “Continue”. Click “Continue” once or twice more to get back to the IRA/Pension Distributions menu page. Select “Nontaxable Distributions”. Select the first checkbox, the QCD exception. Click “Continue.”
    • Note: The 1099-R Nontaxable Income page does not code or mark any specific 1099-R as being a QCD distribution; rather, it sends information to the IRS that one or more 1099-Rs involved a QCD.

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