 Income tax 2023-2024. Pensions and annuities. Get ready and some coffee because we're going to stop the tax man in his tracks with income tax preparation 2023-2024. Most of this information can be found in the line instructions section of the form 1040 instructions taxed 2023 which you can find on the IRS website at irs.gov irs.gov looking at the income tax formula we're focused online one income remember in the first half of the income tax formula is in essence a funny income statement normally an income statement having income minus expenses resulting in net income for taxes we've got income minus various deductions getting to the taxable income typically we would like to be able to exclude income from the income tax equation having income as low as possible resulting in taxable income as low as possible resulting in less taxes we also have to be aware when looking at the income line item of the formula that there could be certain types of incomes that have favorable tax rates not being taxed at ordinary income but possibly other rates such as qualified dividends for example and possibly some capital gains looking at page one of the form 1040 we're now looking at line five for pensions and annuities a and b b being the taxable amount we're going to see some similarities here some crossover to what we looked at in a prior presentation with the iris because we have a similar kind of objective from a government perspective for incentivizing us to save for retirement through manipulation of us with the tax code we then have the form 1099 r this is going to be the form typically used or seen from the financial institution provided to both us and the government the big box is being box one the distribution box two the taxable amount of that distribution box four if there are any withholdings remembering that if you're talking about people that are earning money in their working years they'll get paid typically with w2 as the reporting form if they're in their retired years first a word from our sponsor yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways like our accounting rocks product line if you're not crunching cords using excel you're doing it wrong a must-have product because the fact as everyone knows of accounting being one of the highest forms of artistic expression means accountants have a requirement the obligation a duty to share the tools necessary to properly channel the creative muse and the muse she rarely speaks more clearly than through the beautiful symmetry of spreadsheets so get the shirt because the creative muse she could use a new pair of shoes if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com we're expecting to see more 1099 ours less w2 is typically then the distribution code is going to be quite important and this box will help us to determine whether or not it's going to be online uh four or five whether it be an ira or pension and annuity okay so then if you have any questions about some of those items you can look at the instructions for the form 1099 are which you could find on the ira's website and that will help you to determine or interpret what's on the form and possibly do further research if you need to from there all right let's take a look at lines 5a and 5b pensions and annuities so you should receive a form 1099 are showing the total amount of your pensions and annuity payments before income tax or other deductions were withheld these amounts should be showing inbox one a form 1099 are pension and annuity payments include distributions from 401k 403 b and government 457 plans in other words these are similar to the ira's except that instead of us creating an ira we had we used our employers typically to invest under these retirement type plans the typical forms being a 401k that would typically used for uh non-corporate entities right i mean non-government entities normal businesses the 403 b possibly could be used for non-profits and government as well as the 557 b so the general idea of all of these are somewhat similar the government trying to incentivize us to save for retirement by manipulating our behavior through the use of incentives on the tax code same concept as we saw with the ira the general concept being during working years we put money into these plans and why do we do that because we get a tax benefit typically when we put the money into the plans and then at retirement time we take the money out of the plans we're currently looking at income that means we're taking the money out of the plan because that's usually when we might have a triggering type of event but to understand the rationale we have to understand us putting money into the plan and why it's resulting in a taxable event when we're taking the money out of the plan when we put money into the plan uh if we get a tax benefit that's why we put the money in meaning some of the income might not be subject to tax at the point in time that we put the money in but rather is deferred and then will be taxed at the point in time that we take the money out hopefully in a qualified distribution at the retirement age noting and remembering these plans are not special types of investment tools a 401k plan for example isn't some some some really special kind of vehicle you're used to invest you're probably investing in mutual funds that or ETFs that are under the umbrella of a 401k plan what does the 401k plan do in effect it restricts you from taking your own money out of the plan or else you'll be hit with a penalty to take the money out unless you have a rationale for doing so you wouldn't do that normally you would just put money into stocks and bonds not under the umbrella unless you're incentivized to do so because you get a tax benefit so that's the whole idea we get a tax benefit when we put the money in when we take the money out we have to pay the taxes that's the general concept okay so then we have rollovers and lump sum distributions are explained later so note if i take the money out before retirement then i might be subject to not only taxes but a penalty which could be hefty therefore you want to not do that when you go from one job to another you would like to roll over if you need to the 401k plan or 403 b in such a way that it will not be shown as a distribution on the tax form but rather as a rollover okay so don't include the following payments on lines five a and five b instead report them online one h so disability pensions received before you reach the minimum retirement age set by your employer corrective distributions including any earnings of excess elective deferrals or other excess contributions to retirement plans the plan must advise you of the year years the distributions are includeable in income all right fully taxable pensions and annuities your payments are fully taxable so meaning they're going to be included in income increasing the taxable income subject to the tax so a you didn't contribute to the cost c cost later of your pension or annuity or b you got your entire cost back tax free before 2023 but c insurance premiums for retired public safety officers later if your pension or annuity is fully taxable into the total pension or annuity payment payments from forms 1099 r box one online five b don't make an entry on line five a meaning you're going to put it in five b representing that it's going to be taxable hopefully this information being reflected clearly on the form 1099 r fully taxable pensions and annuities also include a military retirement paying shown on form 1099 r for details on military disability pensions you can see publication 525 military is also often a specialty area in and of itself because there's a lot of exceptions with regards to the people in military service so if you receive a form rrb 1099 r you can see publication 575 to find out how to report your benefits partially taxable pensions and annuities so enter the total pension or annuity payments from form 1099 r box one online five a if your form 1099 r doesn't show the taxable amount you must use the general rule explained in publication 939 to figure the taxable part to enter online five b now hopefully the work has been done by the issuer of the 1099 typically the financial institution to break out the taxable amount and non taxable amount if they don't do that then you can do your research on publication 939 to figure the taxable part but if your annuity started starting date defined later was after July 1st 1986 see simplified method later to find out if you must use the method to figure the taxable part notice when we think about putting money into retirement plans the annuity when we think about an annuity it's going to be basically a a series of payments that you're going to be pulling out in a fixed amount of payments generally so we could think about retirement plans that are going to be set up in such a way that we're going to be receiving basically annuity type of payments as a type of retirement vehicle whereas we might have this other kind of system where we have money under a retirement plan like a 401k plan in which case we're able to pull the money out and then we might have more control over the money that we're going to be pulling out although we could then have mandatory withdrawals after a certain age like 72 for example in which case the government is saying you have deferred it long enough we want you to pull the money out before you reach before you die basically so you can ask the IRS to figure the taxable part for you for a $1,000 fee for details you can see publication 939 if your form 1099 r shows a taxable amount you can report that amount online 5b but you may be able to report a lower taxable amount by using the general rule or the simplified method or if the exclusion for retired public safety officers discussed next applies so insurance premiums for retired public safety officers so if you are an eligible retired public safety officer law enforcement officer firefighter chaplain or member of the rescue squad or ambulance crew who is retired because of disability or because you reached normal retirement age you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for coverage by an accident or health plan or a long-term care insurance contract obviously that's a very specialized kind of area so if that comes up you're probably going to want to do some more research with regards to that particular case the premiums can be for the coverage for you your spouse or dependents the distributions must be from the plan maintained by the employer from which you retired as a public safety officer the distribution can be made directly from the plan to the provider of the accident or health plan or long-term care insurance contract or the distribution can be made to you to pay the provider of the accident or health plan or long-term care insurance contract you can exclude from income the smaller of the amount of the premiums paid or three thousand dollars you can make this election only for amounts that would otherwise be included in your income the amount excluded from your income can't be used to claim medical expenses deductions meaning you can't if it wasn't going to be included in income then you already have the benefit right if it was going to be included in income then possibly if this applies you might get the benefit there of removing it so an eligible retirement plan is a government plan that is qualified trust or a section 403 a 403 b 5 457 a plan caution so you can exclude from income only the smaller of the amount of the premiums paid or three thousand dollars this is true if the distribution was made directly from the plan to the provider of the accident or health plan or long-term care insurance contract or if the distribution was made to you and you paid the provider of the accident or health plan or long-term contract simplified method you must use the simplified method if either of the following applies number one your annuity starting date was after July 1st 1986 and you used this method last year to figure the taxable part so you have some consistency in the method that's going to be used which is a general rule for basically accounting and taxation so two your annuity starting date was after November 18th 1996 and both of the following apply one or a the payments are from a qualified employee plan a qualified employee annuity or a tax sheltered annuity b on your annuity starting date either you were under age 75 or the number of years of guaranteed payments was fewer than five c publication 575 for the definition of guaranteed payments so if you must use the simplified method complete the simplified method worksheet in these instructions to figure the taxable part of your pension or annuity for more details on the simplified method you can see publication 575 which of course you can find on the irs website here's a quick look at it we won't go into it in detail here rollovers so remember that rollovers is going to be a situation you want to make sure to identify and inform people of if they're going from one job to another and they have a retirement plan with one of those jobs and they and they don't want to pull the money out but roll it over generally a rollover is a tax-free distribution of cash or other assets from one retirement plan that is contributed to another plan with 60 days of receiving the distribution however a rollover to a Roth IRA or a designated Roth account is generally not a tax-free distribution so you can imagine the general idea here would be well if you have money that's in investment accounts such as mutual funds but they're under the umbrella of some type of retirement account meaning you can't take it out because you got tax benefits on it then you can't just take the money it's going to be difficult to to roll that money into something else in other words you want to make sure you don't take the money out be subject to penalties and interest receiving a 1099R that has a distribution code that's going to be subject to penalties and interest what you would like to do is possibly go from one institution to the new institution possibly with a new place of employment and say hey I had a old 401k plan here I would like you to roll it over so that it's still under the umbrella of a retirement type of plan the same type meaning you can't typically go from a normal retirement plan to a Roth with a rollover because those two things are taxed differently but if I go from one normal kind of retirement plan to another type of retirement plan that has the same type of restrictions you would think that would be a fair thing to do or something that the government would want to allow you basically to do so that's the general idea now note that a normal retirement plan is one where you get the benefit when you put the money in and then when you take the money out you're going to be taxed on it typically at retirement a Roth is reversed meaning you get taxed on it when you put the money in it grows and then and then you get the tax benefit when you when you when you take the money out so it's kind of the opposite so converting from a Roth to a normal or a normal to a Roth is more complicated than simply rolling over from a normal retirement account to a normal retirement account you would think so use lines five a and five b to report a rollover including a direct rollover from one qualified employer plan to another's or to an IRA or SEP so note that the IRA so if you go from a place of employment where you have a 401k plan for example and then you become self-employed or you just stop working or you work for someone that doesn't have a 401k plan then what are your options well well if you want to take the money out of the 401k plan then you could put it possibly into an IRA which you would think would be kind of the non-employee equivalent of the same kind of concept right so if I don't have access to a 401k plan then I can use the IRA to have a similar conceptual framework to get at least some tax benefits okay so enter online five a the distribution from the 1099 r box one from this amount subtract any contributions usually showing in box five that were taxable to you when made from that result subtract the amount of the rollover enter the remaining amount online five b so if the remaining amount is zero and you have no other distributions to report online five b enter zero so if the whole thing is rolled over which is often the case you might roll over the whole thing see publication five seven five for more details on rollovers including special rules that apply to rollovers from the designated Roth accounts partial rollovers of property and distributions under qualified domestic relation orders lump sum distribution if you receive a lump sum distribution from a profit sharing or retirement plan your form 1099 r should have the quote total distribution to end quote box in box to be checked so you may owe an additional tax if you received an early distribution from a qualified retirement plan and the total amount wasn't rolled over so in other words if you got the whole you know a lump sum amount pulled out that could be indicated but that often might happen when people are going from one job to another in which case you have to be careful to do that because if you pull all the money out you could be subject not only to taxes but also to the penalties for early withdrawal so for detail see the instructions for schedule two line eight enter the total distribution online five a and the taxable part on five b the totals for details you can see publication five seven five