 Income tax 2023-2024, pensions and annuities tax software example. Get ready and some coffee because we're laying down the facts about income tax preparation 2023-2024. First, a word from our sponsor. Actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. It's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our Form 1040 example problem using LASERT tax software. You don't need tax software to follow along but if you have access to tax software, it's a great tool to run scenarios with. You can also get access to the Form 1040 related schedules and instructions at the IRS website. IRS.gov, IRS.gov, starting with Adam Taxman. Just trying to avoid the dang Taxman livin' in 90210 Beverly Hills. We've got the single filer to start off with back to 100,000 W2 income standard deduction at the 13850 for the taxable income 86150, mirroring that in our income tax formula in Excel 100,013850 taxable income 86150, the tax being calculated by LASERT software 14266 on page 2. There's our 14266. We're now going to be looking at the 1099R once again. Going back to page one last time, noting that we looked at the 1099R with relation to an IRA distributions. Now we're looking at the pensions. So we were on line four. Now we're going to be on line five. Note that they're very similar in nature and that they're going to be typically reported here on the Form 1099R, which is labeled distributions from pensions, annuity, retirement, or profit sharing plans, IRA insurance contracts, and so forth. The major box is being box one, the gross distribution, box two, the taxable amount of the distribution. Box seven is important because you could have a code. This check box could give you an indication as to whether it's going to be an IRA or pension distribution. And then you could have the withholdings that could be here as well. Remembering that if someone is in their working years, then you would expect the major forms you would receive are like W2 forms. For example, if they are in retirement years, you would think that the major income forms you might be receiving are the 1099Rs, which are reflecting money that has been put away for retirement in an account that's under the umbrella of some kind of tax entity, meaning you're still usually investing in stocks and bonds, but you put it under the umbrella of say an IRA, that's what we talked about before, when you don't have access usually to an employer plan such as a 401K or a 403B because there's more limitations to put money into an IRA and less benefits such as matching so that those are typically going to be used for added contributions or so that because you don't have access to some other form of contribution or if you put money into like a 401K plan or something like that, which is usually more, you might have more benefits to put money in like putting more money in and having matching. And now we're going to be pulling money out because we got a deferral of the income related to those plans and typically they'll be hopefully properly reported on the 1099 and therefore fairly easy to do the data input. So with tax planning, you have two kind of or with tax preparation or tax issues, you have two things to be thinking about. One, just the data input, which is usually fairly straightforward because the 1099 will guide you. And then two, what do people do in retirement with regards to their withholdings, meaning now they have to figure out when they pull money out if it's taxable or not. If they're subject to tax, how are they going to pay the tax? Do they want to withhold it from the 1099 or do they want to make estimated tax payments, for example. And when you put money into a retirement plan, again, that takes some tax planning situations as well. Okay, let's start off with the normal scenario like we did with the IRAs. Let's imagine that the person is in retirement age. So we're not talking about them putting money into the plan. They're retired and now taking money out of the plan. So let's say they're like 67. So we'll say 2023 minus 67 date of birth. Let's bring it back to 1956 about. And so we're going to say, all right, so then they're in retirement. Let me go back here and let's say they do not have W2 income. So I'm going to remove the W2 income and say now they're going to get their income instead from pensions and IRAs. And let's say this is pension one. And I'm going to say the distribution code is seven because it's a normal distribution. That would be what you would normally see. You would think if it was just a normal distribution, which is going to be subject to tax. And then we're going to say the taxable amount, let's say is 75,000 this time. And then it's all taxable. This is the gross distribution, I should say, and the taxable amount of the distribution. They might have withholdings on it. Let's imagine they have withholdings of $6,000 of withholdings. So that would be box one populated box to the taxable amount, same numbers. And then the withholding amount is going to be the and then the code is seven. And then box four was the withholding. Let's make it a little bit different. Actually, let's make it. Let's say that's that 70,000 was taxable just to make it different. So then I'm going to go back to the forums and say, all right. So now notice it popped me. It bounced me off to the 1040 SR, but I'm still going to view it on the form 1040. So we have the same layout. So it'll be easier to see. So now we're going to say 75,000 was the total amount, but only 70,000 of it is going to be taxable. Therefore, only 70 of the 75 is included in the taxable income. If I mirror that in my formula, I'm going to go back to the income tab. No W2 income. Instead, we have the 1099. So I'm going to say pension distribution and I'll say 70,000 of it is taxable. The full amount was 75, which I'll put on the side so I can see it. I'll sum it up over here just so we can see that for my informational purposes. But the 70 is the taxable amount, which is going to pull into the first line of my equation. They're over the age limit. So I'm going to add the standard deduction has an added 1,850. So that comes out to 1570 taxable income at 54,300. If I go back on over here, 54,300 and then page two, 7,265 is the tax. So 7,265 and then I said that we withheld 6,000. So withholdings then payments, I'm going to say from 1099,6,000. That's 6,000 then pulling over to my page one. So there's the tax 6,000 withheld. We have 1,265. If I go back on over 1,265 plus a $27 penalty, 27 gets us to 1292. Actually, this tax was what was it? 7,259. So 1,286 and 1,286. Okay, so that's the general scenario that we would see in retirement. Now let's imagine that they weren't in retirement and they pulled the money out early. So what would happen then? Let's go back on over and say, okay, let's bring it back to saying now we'll say that the ages will bring it back to 1977. Let's say and then we had the pension income. And let's say now it's 75,000 and 75,000 that they pulled out. I'm going to remove the federal withholdings, but the code this time was that it was an early distribution, no exception. So that's a bad code to see typically. So if we saw that in box seven, we're going to go, oh no, that could cause a problem. Notice also that you want to be careful to assign it to the proper spouse if they are married because that could have implications and that this box represents if it's going to go into the IRA or not. So in other words, if I go back on over here, I could see then if I go to the first page, we now have the 75,000. Now we're at the 13850 because we're back down to the standard deduction. So if I mirror that over here, I'm going to say now all 75,000 was taxable. And if I go back on over now, they're not over the age limit standard deduction back down to 13850. That gets me to 61,150. So we're at 61,150. And then on page two, tax is 8,766. But we also have this other tax, which is substantial, 7,500. That's coming from schedule two line 21. If I go to schedule two line 21, I can see it right here. It's the additional tax on IRA or other tax favorite accounts. 5329 is the form it's coming from. Additional tax on qualified plans. And you could see basically it's taking 10% of the distribution because it was taken out before the retirement age. Now you could have a situation where there's a rationale or reason for it, meaning early distribution exception applies. If that was the case possibly, then you take the early distribution and there's an exception for whatever reason. We still haven't included an income. So that's a common misconception where people say, hey, look, there was an exception. I shouldn't have to pay taxes on it. It's like, well, no, you still have to pay taxes on it. You're just not going to get hit with that massive penalty because you still got the benefit of taking the money tax free when you put it into the retirement account. So there we see that. And then just to note the difference between these two forms, you can see that this is on line 5A. If I go back on over and check this off and go back, you could see then it pulls it up to 4A. So that's the difference between 4A and 5A in our data input form, which will typically be indicated on the 1099R, which is used for both by this basically box right here for IRA or not. So I'm going to go back on over. I'm going to uncheck that and say, okay, let's uncheck that. And that brings us back here. So there it is. Now the other common thing you might have is that one, some person goes from one job to another job, in which case you might see a code that says like G, which is a rollover. So now we have a rollover. And so that would mean that box one would have the amount box to hopefully would be something like zero because none of it is taxable. It's just reporting that you went from one place to another, which might happen when you go to a new job. For example, you're still subject to the same same issues with pulling the money out, but you want to put it under a different like managing or financial institution. So now we have 75,000 pension and annuities marking that it's rolled over and therefore none of it is being included for taxes. It's not having an impact on the taxable income. So usually it's fairly straightforward to do the data input, noting again that there's a difference between kind of the data input and then and then the planning for it. And you might have some planning after you do the data input, which would be like something like how much do you need to withhold next year so you don't get hit with penalties. Is there any way that you could pull money out of the pension plan that's subject to tax and some money out of plans that are not subject to tax so you result in a lower amount of taxable income. And then when people are moving from job to job you have questions about well should you roll the money over typically roll the money over and don't take it out if possible you might get hit with a penalty. If people really need to take it out because there's an emergency, then you can look into basically possible scenarios in which case it may not be subject to tax in certain situations like a like a declared disaster or something like that. And see when it might be pulled out noting that you want to make sure that the financial institution is made aware of the issue so that when they report the information on the 1099 are which will go to the IRS. We have something in box seven that does not indicate hopefully that it's going to be subject to penalties. Right we want it to be on the 1099 are so that it will not cause us any problems with the government and remember that with distributions it'll probably still be subject to income tax. But we want to get the get rid of the penalties there's not really a way around the income tax if you didn't have to pay taxes when you put the money in. But we don't want to have a penalty on top of the tax on the distribution is the general idea if I go back to the first tab. You can also look through some of the codes here for more information that might give you ideas of when of when distributions might not be taxable. You can look into some other tax planning strategies and whatnot with regards to iris in terms of trying to maximize the tax benefit of the iris. You can also look at the instructions if there's any issues with this form that you have questions with. You can look at the instructions for the forms and take a look at at these code numbers which can help you guide you with the data input tell you what's happening help you to explain it. And also guide you for further research that you can go to from there.