 Income tax 2022-2023. Ira distribution software example. Let's do some wealth preservation with some tax preparation. Here we are in our example form 1040 populating it with LASERT tax software. You don't need tax software to follow along but if you have access to it it's a great tool to run scenarios with. You can also get access to the form 1040 related schedules and forms. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it. At the IRS website IRS.gov IRS.gov starting point as usual single filer Mr. Anderson no dependents 100,000 at the W2 income to start with and then we got the standard deduction 12,950 getting us to the taxable income 87,050 and we mirror that in our worksheet over here this is our tax formula 87,050 depending on the software to do the calculation on the second page where we have the calculation at the 14774 and then we have our withholdings getting us to the amount of refund which is mirrored here but we're focused here now on the tax calculation first page side of things and we're looking now at distributions from an IRA distribution now remember when we're thinking about IRA distributions you can kind of think in general of the general concept of the IRS trying to incentivize us to save for retirement what they're doing is taking they're not coming up with anything new like it's not like they came up with a new investment tool this is a totally new investment tool no they're just saying that if you use your normal investment tools which are usually mutual funds and put them under the umbrella of an IRA then you possibly could get tax benefits of that the typical tax benefit whether it be a 401k 403b IRA distribution is that you don't have to include it in income or you get to remove it from income with an above the line deduction when you put it in and then when you get the distribution at retirement then that's when you have to include it in income so you get this tax deferral type of situation now we're focusing here on the IRA but you have similar kind of concepts with the 401k and whatnot in that if you were to take the money out early then you're gonna have to pay taxes on it because you're gonna have to pay taxes when you pull it out at retirement or whenever you pull it out but you also might have penalties by that point in time so the general rule would be that during someone's working years you would expect most of their income to be some kind of earned income such as W2 income schedule C income and that kind of thing and then in retirement years you would expect to see people having more income not from W2 income because they're past their working years and having distributions from things like iris and pension plans down here and you could have similar kind of situations where you have withholdings and whatnot from the IRA distributions and the pension distributions which you want to be very careful of and mindful of when talking to clients is that if they're trying to go from one job to another or they're going from one financial company to another then they don't want to take the money out of their IRA or 401ks or so on but rather make sure that they record it as a rollover otherwise they're going to have this issue of a distribution problem because they'll be penalized for an early distribution so that's the general idea so let's first just think about a situation where we'll change the age so we have someone that's not going to be hit with a with a penalty for taking the distribution early and then we'll look at a penalty type of situation all right so i've changed the age now so they're in retirement age and then the code i'm going to put as uh it's going to be a normal distribution and that's going to be a code that will typically be reflected on the form you're going to receive which is going to be something like a 1099 r which will be required to be given by the government from the financial institution us law requires financial institutions typically and it's usually fairly straightforward where you've got the gross distribution up top the taxable amount uh below it if it's a normal distribution you would expect these two things to to be the same because you got the tax benefit when you put the money in therefore the distribution is taxable the distribution code then down here on line seven uh would be a normal distribution code which i believe is a seven you can and if you if you see something unusual on this line you can take a look at this second page over here of the form or look it up in the irs website gives you a list of the distribution codes first we have the early distribution that's the one you don't want to see in most cases they're under age 59 and a half right because they took the distribution early before the retirement years early distribution exception applies so now you've got an early distribution but there's an exception uh disability possibly having an exception death except prohibited trans uh transaction section 1035 exchange uh that's that's an unusual one to see seven normal distribution so if someone is over out or in retirement you would expect then that would be the code that you would expect to see a normal kind of distribution at that point if they're under the retirement age then you expect to see a number one that's what you don't want to see unless you can get to some other exception other than the age requirement to pull the money out and then eight excess uh contributions plus earnings nine cost of current life insurance protection and so on so let's assume it's just a normal distribution for now and we're going to say that it's uh an IRA so let's check it off as an IRA and i'm going to say it's for $1,000 and all of it is taxable so that's going to be my data input because i'm not imagining there's an amount here here distribution uh code number one so let's go back on over and say okay boom so now i can see that we've got then the IRA here and we got the taxable amount is the uh one thousand on the IRA that's bringing the income up let's actually look at the form 1040 i'm pulling over for the 1040 s r because of the age but i think it's still easier to see in the same format of a 1040 so i'm going to go to the 1040 now they were born before january 2nd there's the 100,000 there's the added thousand now the standard deduction has changed because they're over the age to uh to have it change so let's pull those into our forms over here i'm going to imagine now there's going to be income from an IRA so i'm going to go back on over a distribution so we're going to say all right let's say that these are this is an IRA let's say uh distribution right is that what i had over here this is going to be the IRA distributions and then i'm going to make this black and white so i'll make it black and white as a header and i'll leave a bit of space because we might have a few of them if someone is in retirement they could have a quite a few places that they're getting distributions from so i'll leave a bit of space here and i'll just put an IRA one or whatever the company $1,000 sum it up down below with the total tittle total IRA distribution and then we'll put this on the outside equals the sum here boom boom boom up to the 1,000 and this i should have moved this down i'm gonna cut this i'm gonna take i'm gonna i'm gonna just cut this control x and i'm gonna put it down here and then i'm gonna delete a couple rows so now we've got the the w2 stuff and then the IRA distributions and i'm gonna sum it up on the outside equals sum it up on the outer column and so there's the 101 that pulls over to the first tab there's the 101 the standard deduction needs to be increased because they're over the the age to for it so i'm gonna say this is gonna be single plus this cat this item and so that's gonna give us the 14 7 that brings us to the 86 300 86 300 that is boom looks good page two then 14 609 calculation for the tax just they call it a tax calculation which is just a so i'm gonna say this is now 14 609 okay so that's gonna be uh the normal kind of situation now let's let's imagine a situation where all of the income is basically from the the the IRA distribution instead of the wages income so i'll make this now a hundred thousand i'll make this zero and then i'll imagine that we had withholdings with the distribution so i'm going to go back on over here this would be a very large distribution but same concept let's make it a hundred thousand and then let's imagine that we withheld on it the whole thing is taxable we withheld uh 15 000 let's say so now we withheld 15 000 on the 100 000 and in my w2 income there is none i'm gonna say because we don't have any of that boom get out of here get out of here and we're going to go to the forms then i'm still going to just look at the uh 10 40 so now we've got the taxable amount ira distribution 100 000 if i was to look at my form i would imagine 100 here 100 here and then the code i would be seven and then we would have the federal income tax withheld box for 15 000 right and so then i can go back on over and say there's the 100 000 so if i mirror that over here i'd say okay now i don't have any w2 income that's gone this is now 100 000 from the 10 99 r r and then 14 7 85 300 so that's the 85 300 and then page two has the withholding the withholdings are not from the w2 though if i go to the payments i'm going to say these i'm going to make some space make some space here insert insert and these are going to be withholdings this is let's just say 10 99 r withholdings withholdings something like that should serve the purpose so we can just do this because there's no w2 stuff and i'm going to make some blue areas leaving some space because we could have a few quite a few 10 99 r's for the retired folk and so this is going to be 10 99 r the first one 15 000 summing that up down below i'm going to delete a couple lines i know i'm doing this fast but it's not an excel course i'm just showing how we can kind of mirror this in excel this is going to then pull over this needs to be summed up here this is going to pull over then to page one so i'm going to go back on over boom page one that's not page one there's too many tabs it's out of control so there's the 15 getting us to the 391 390 something's wrong something's wrong 14 39389 is the tax 14389 15 611 611 okay so that's just the general idea you get the gist the gist has been gotten i think so then let's just take a look at another one of of these items so the other main one that we might see is like an early type of distribution and then we also could see like a rollover situation so i'm going to bring it back to where we were before i'm going to change the age so now they're not in retirement years and then if they have a distribution it's going to be an early distribution so now we're imagining that there's a hundred thousand here it's all going to be taxable but the distribution code let's say it's a thousand here and a thousand here the distribution code is now going to be a one which is the bad distribution code because then you can be hit with the penalty on top of it right so now i've got a one thousand dollars uh input and there's no withholdings here so now i'm going to go back on over so now they're under uh the age and that the form is indicating that it's an early distribution so a hundred thousand w two income again and now we've got the ira a hundred thousand here so we're at the same point that we started at the beginning to twelve thousand nine fifty we're back to eighty eight uh fifties let's bring that over here so now i'm going to go okay a hundred thousand not from the ira but from the w two income again hundred thousand the withholding or payments is going to be the fifteen thousand up here fifteen thousand and then we're going to say there's the hundred and then this is back to just normal withholdings or standard deduction of a single individual that's not over the age limit to boost it up there's the eighty seven fifty so eighty eight fifty and so because i have a thousand in the distribution one thousand in the distribution one oh one twelve nine fifty eighty eight fifty okay so then if i go to page two calculates the tax fourteen nine nine four i'm going to let i'm going to do that fourteen nine nine four and then uh we also have this hundred dollars of other taxes so it's and it's coming from schedule two as you can see so schedule two we've got the hundred thousand uh of additional taxes so if i was to add like a schedule two here uh which let's add that i'll say schedule two is additional taxes so we'll deal with that uh later or let's just pull it in here i have other taxes uh here so let's pull it in from this tab that i started and then so we had self employment and let's say that we call this what what are we going to call it we're going to call it uh we're going to call it additional tax on ira so added added tax on ira might make it save a little bit of room added tax on the ira and let's make it black and white so i'll make it black and white we shouldn't need much space down below because we shouldn't have that happening all the time so i'll just have a couple fields for it maybe to make it blue and bordered and then ira one or whatever the ira is and you could calculate it the added tax is usually going to be equal to the ira distribution which was one thousand times ten percent point one times ten percent point one so uh so ten hold on a second k pos oh this one thousand times point one 100 and then we'll have total total added tax on ira equals the sum of those two and then this totals it up down below so that should pull into page one of the added tax bringing us to 1594 so 1594 if i go to the 1040 page two just to double check this 1594 and then we paid 15 000 so that gets us down to the to the 94 so that's the general idea this amount do this time so that's what you don't want to see happen a hundred dollars doesn't look too bad but obviously you could see that can start get quite big quite quickly if someone just pulled out their their entire ira or similarly if they pulled their entire 401k and just say ah just give me the 401k if i'm switching jobs or something because then you're going to get hit with a big penalty because that could be quite substantial uh in dollar amount that could be in the 401k so be careful of that now what you could do to not have that happen is roll it over so i'm going to say i don't want to see a on one there i want to see a g there and that's going to indicate that it's a that it's a rollover of some kind so so you're hoping when you go to another or a financial institution to have your investments in you don't want to pull your money out and then put them on you know well you you might be able to structure it that way but you would like to make sure that you structure it in some type of way that it's going to qualify for a rollover and oftentimes you might want to go to the new financial institution and say hey look i'm rolling my money over from whatever it was before vanguard or e-trade or whatever and i'm putting it in here i want you to structure that as a rollover under whatever kind of retirement account will fit because it's currently under an an ira or something and usually the financial institutions wanting to have your business will be able to help you facilitate that and they're quite quite uh kind in doing so because you know they want your money in their place instead of the other place so just make sure to do that otherwise you get hit with penalty and that would be bad so now you got the same 100 000 now though it's calculated as a rollover now note that when you do that some people uh well actually now it's not going to be taxable at all so now i'm going to go back on over and say there's nothing here so we're going to say now there would be something in box one possibly but not box 2a because it's saying hey look there was kind of like a distribution meaning it came out of one account that's under the umbrella of an ira but it went into another one therefore it's not a taxable event and that's what you'd like to be able to see why isn't it because of the description code that's going to be down here which calculated as a rollover which is usually the most common format of it not being taxable so uh so if someone needs the money notice that in like this this whole like uh emergency thing when when the government told people that they couldn't go to work or anything because of social distancing with the whole covid thing that caused financial emergencies to many people and many people can come up with financial emergencies for whatever reason right they need the money they have the money it's in their ira or under their ira or 401k plan but they can't take it out because if they take it out they get hit with a penalty so in those kinds of situations you want to you want to see okay is there any kind of situation where it can have it have it like this where i can pull the money out in some way and have some rationale which would be box represented by these codes that would allow me to take the money out right without getting hit with a penalty you're still gonna have if you were to take the money out and not have it rolled over then you still might have to pay taxes on it so let's say you took the money out and the government said well now it's a qualified uh wait you took it out because of an emergency well then they're just not going to hit you with a tax uh taxes taxes i mean the added tax penalty but they're still going to make you pay the taxes on it because because uh you got you you got the benefit when you put the money in for it in this case you're not actually really taking it out you're just rolling it over but if you did take it out and you had a qualified reason for taking it out then it's likely it would still be recorded as income but you wouldn't be hit with that 10 percent penalty so a lot of times people get confused between the fact that it's recorded as income and the fact that you're getting hit with a 10 percent penalty if you're actually taking the money out and not rolling it over even if it's a qualified distribution usually because you're in retirement age or possibly because there's some other like reason for taking it out early then then you're still gonna have to record it as income most likely you're just not going to get hit with the 10 percent penalty in that case that's the general rule so now we're saying it's over here is an ira distribution but none of it's a taxable amount and they give you the the code up here which is basically saying it's a rollover so now we're telling the iris look this matches what's on the the form so but it's a but it's a rollover so then it wouldn't be included in income so those are the general rules just remember that if you're dealing with someone that's in retirement it's likely that you're going to see a lot more of this kind of activity and it's likely that you're going to have to do a little bit more complex work possibly with managing the withholdings through the the the distributions from iras and pensions and whatnot or possibly calculating estimated tax payments whereas if the w2 wage is usually obviously the withholdings are calculated up top with the withholdings and then on the input side when you're putting money into the retirement plans which we'll talk more about later because right now we're talking about we're talking about the income side of things when we're talking about the the putting money into an ira it's kind of like a deduction in some ways right it's an above the line deduction or a removing of the amount from income that would be reflected on the w2 form so then you're going to get a tax benefit when you put the money in so when you put the money in you basically get a tax benefit which is kind of like a deduction or the equivalent being a reduction of the taxable income and then when you take the money out you're going to get hit with the tax because it's just a deferral and if you don't take it out because you're in retirement and you have no other reason to take it out you could also get hit with a penalty also just want to point out that the only reason you put the money into an ira account or or a 401k is not because it's some special magical investment that the government made up right the government's not good at making up investment tools the government is just good at not hitting you when you put your money somewhere so they're going to say i'm not going to hit you with with taxes if you put your if you put your money under this investment tool that was made up by financial investors just smart people not the government right and then it's up but it's under the umbrella of of an ira or whatnot to have a tax shelter so the government doesn't hit you when you put your money there they're going to hit you when you take the money out is the general rule so in other words most ira's 401k plans are using the same investment tools that you would use even if the government wasn't incentivizing putting money into these types of accounts which would be mutual funds typically stocks and bonds and whatnot