 Income tax 2021-2022. Pensions and annuities. Get ready to get refunds to the max. Dive it in to income tax 2021-2022. Here we are in the income tax formula focusing in on line one. Again, that being the income line, noting that this is in essence a summary which you could think of as the form 1040 being a summary. This being a more condensed summary than the 1040 and the income line then being supported by other schedules such as the schedule one, other forms such as the schedule C, schedule E, schedule D and so on and so forth. This is page one of the form 1040. We're concentrating this time on the pensions and annuities where we have 5A and 5B including in this example the 1000 from it. We're thinking about the form that would be reporting these items similar as what we saw with the IRAs which is going to be the 1099R. You have a similar kind of situation in that you would expect these types of distributions to be taking place more on the later years of a client's life or a taxpayer's life. So it really depends on the age range that you're talking about. When you're talking about the working years then you're often thinking about a planning type of situation for people to plan for retirement and taking advantage of tax benefits as they do so and then in retirement you're looking at the distribution sides of things where you're more likely to see these form 1099R pensions and annuities for example. So you should receive a form 1099R showing the total amount of your pension and annuity payments before income tax or other deductions were withheld. This amount should be shown in box one of form 1099R. Pension and annuity payments include distributions from a 401K, 403B and government 457B plans. So when you work for a company and this being a little bit different just to do a little comparing and contrasting from an IRA to say something you might get from an employer noting that something like a 401K plan is one of the biggest benefits and you could have a 403B or a 457B depending on the type of organization you are in. That's one of the biggest benefits that a company can give to an employee because they could have basically matching contributions in it for example but also you can increase the limit that you can put into those plans which basically means you're just putting money away for retirement which you would like to do anyways and you get that huge deferral benefit in that when you put the money in you're not going to have it taxable at the point in time that you put it in and then when you take it out that's when you're taxed and we're focusing in at this point at the point in time that we're going to take it out at the end of the process. Now note when you're doing this logistically and you're kind of comparing this to like an IRA you might say hey look if I don't work for an employer that offers me a 401K plan or something like that then can't I still put money away for retirement and still get a benefit and typically you can you could put it into an IRA but the amount of money that you can put into an IRA is usually a lot less than the amount of money that you can put into the 401K so there's going to be limits in terms of how much you can put in there and then logistically when you put money into an IRA it's not going to be reported on your W2 it's not going to lower the W2 in box one but instead you got to put it as one of like the above the line deductions adjustments for adjusted gross income on the tax return when you look at a 401K or something like that when you're actually putting money into it it will be done for you in essence on the W2 because box one will already have the adjustments and then you'll see what that adjustment is further down on the W2 indicating possibly how much money you put into like a 401K or a 403B or something like that once you put the money in it works in a similar fashion as like a normal IRA that we talked about in the past you're trying to put money in get the benefit up front and then when you take the money out you're going to pay taxes on it meaning you've deferred the taxes all the way to the point where you take money out which will typically be a big benefit however you can see what the government is doing here they're trying to incentivize people to save for retirement and so they're forcing you to put money into these accounts in essence by giving you a tax benefit they're not forcing you but they're giving you a big incentive to put the money into this account by giving you a tax incentive and your only reason you're putting it into something under the umbrella of a 401K is because of the benefits that you're getting in large part the tax benefits that you would be getting in other words putting money into a 401K you're going to put it into the similar investments that you could if there wasn't any special kind of umbrella for retirement accounts like a 401K or an IRA or a 403B or whatever because you're just going to be putting it often into stocks and bonds or something like that mutual funds index funds and whatnot you could do that without a 401K but the 401K gives you that tax benefit so the investments themselves are nothing like special they're not like special investments you couldn't do outside of the umbrella of a retirement type of account the reason you put them under the umbrella of a retirement type of account even though it restricts your access to your money is because you get a tax benefit from it the tax benefit being designed to incentivize people to save for retirement so disability pensions received before you reach the minimum retirement age set by your employer disability pensions received before you reach the minimum retirement age set by your employer fully taxable pensions and annuities your payments are fully taxable if A you don't contribute to the cost C cost later of your pension or annuity or B you got your entire cost back tax free before 2021 but C insurance premiums for retired public safety officers later so that's going to be a special kind of condition if your pension or annuity is fully taxable enter the total pension or annuity payments front forms 1099R box 1 online 5B don't make an entry on line 5A so usually you can basically follow the form in order to designate whether the item is going to be taxable and not we'll see that more when we get to the tax example and our tax problem example in a future presentation fully taxable pensions and annuities also include military retirement pay showing on form 1099R your details on military disability pensions C publication 525 so you can find that on the IRS website if applicable to you if you received a form RRB 1099R C publication 575 to find out how to report your benefits partially taxable pension and annuities so these are going to be more kind of specialized conditions most likely not the norm in terms of the conditions because you have the partially taxable amount enter the total pension or annuity payments from form 1099R box 1 online 5A if your form 1099R doesn't show the taxable amount you must use the general rule explained in publication 939 you can find that publication on the IRS website to figure the taxable part to enter online 5B but if your annuity start starting date to find later was after July 1st 1986 see simplified method later to find out if you must use that method to figure the taxable part you can ask the IRS to figure the taxable part for you for a $1000 fee for details you can see publication 939 if your form 1099R shows a taxable amount you can report that amount online 5B so again hopefully you have a situation where the 1099 is fairly straightforward and it's showing you the taxable component for you if you have any questions about that you probably want to contact your financial institution and discuss some of those some of the kind of gray areas with them 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 the retired public safety officers discuss next applies partially taxable pensions and annuities if you are an eligible retired public safety officer law enforcement officer firefighter chaplain or member of a rescue squad or ambulance crew so this is obviously a specialized area that would be specialized to certain types of workers you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay for the premiums for coverage by an accident or health plan or a long-term care insurance contract you can do this only if you retired because of disability or because you reached a normal retirement age the premiums can be for coverage for you your spouse or dependents the distributions must be from a plan maintained by the employer from which you retired as a public safety officer also the distribution must be made directly from the plan to 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 or $3,000 you can make this election only for the amounts that would otherwise be included in your income an eligible retirement plan is a government plan that is a qualified trust or section 403A 403B or 457B plan so typically we're talking about people that are kind of working for the government in these instances here and so therefore you're not seeing a 401K you're looking at the 403A 403B and 457B type of plans that work in a similar way as a 401K if you make this election reduce the otherwise taxable amount of the pension or annuity by the amount excluded the amount shown in box 2A of form 1099R doesn't reflect the exclusion report your total distribution on line 5A and the taxable amount on line 5B enter PSO next to line 5B if you're retired on disability and reporting your disability pension on line 1 include only the taxable amount on that line and enter PSO and the amount excluded on the dotted line next to line 1 simplified method you must use the simplified method if either of the following applies one, your annuity starting date was after July 1st 1986 and you used this method last year to figure the taxable part two, your annuity starting date was after November 18th 1996 and both of the following apply A, the payments are from a qualified employee plan a qualified employee annuity or a tax shelter 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 see publication 575 for the definition of guaranteed payments simplified method continued if you must use the simplified method complete the simplified method worksheet in these instructions you can find those on the 1040 form 1040 instructions for more details on the simplified method you can go to publication 575 found on the IRS website or publication 721 for US Civil Service Retirement Benefits annuity starting date your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed annuity starting date if you are the retiree use your age on the annuity starting date if you are the survivor of a retiree use the retiree's age on his or her annuity starting date but if your annuity starting date was after 1997 and the payment are for your life and that of your beneficiary use your combined ages on the annuity starting date so an annuity is basically a series of payments that are going to be set payments for a particular time frame that's usually going to be based on some kind of conditions such as the life expectancy of an individual so if you are the beneficiary of an employee who died see publication 575 there's a link to that or you can find that on the IRS website if there's more than one beneficiary you can see publication 575 or publication 721 to figure each beneficiary's taxable amount cost, your cost is generally your next investment in the plan as of the annuity starting date it doesn't include pre-tax contributions, your net investment may be shown in box 9B of form 1099R rollovers so we have a similar rollover situation as we had with the IRAs so you can imagine this type of situation hopefully again for most of the time the actual 1099R will be fairly straightforward and you can basically be guided by the 1099R but some of the things that you would expect to see on the 1099R would be like a normal type of distribution if someone was older over the age limit and they're receiving the normal distribution which would be taxable you could often see a situation where they pulled out the money early possibly because they left a job which you have to be careful of and that could be a question that clients have what should they do with the money that's in the retirement plan when they go into another job well they don't want to pull it out if they're under the retirement age they want to roll it over so in that instance you would have it going out possibly of one account and going into another but it's not going to be a taxable amount and it shouldn't be subject to any penalties if they don't do that and they simply pull the money out then you have a distribution which is an early distribution which is likely to not only be taxed which is you can't get away from if it was a distribution but also possibly subject to a penalty possibly like a 10% penalty if someone is trying to go from one financial institution to another or likely going from one place of employment to another place of employment they want to make sure that they're talking to the financial institutions and hopefully having it so that they can directly roll over any funds possibly in one account in another account in such a way that they're not going to be subject to penalties for pulling the money out and be taxed at that point in time that would be the general idea that you would like to be able to do if you're going from say one employer to another so generally a rollover is a tax free distribution of cash or other assets from one retirement plan that is contributed to another plan within 60 days of receiving the distribution so note what you really typically want to do is talk to the financial institution that you're going to be going to possibly with a new employer or whatever financial institution you're working with and say and ask them to roll over see if you can get the thing the investments rolled over so that you don't have the in between the third party taking the money out and then putting it back in and hopefully that will make it as easy as possible to get the 1099R populated correctly designated it as a rollover so the IRS knows it's a rollover and it's designated on their end correctly as well or you can take the money if you were to take the money out then you would have to be able to redistribute it into another account qualifying account within the time frame provided 60 days of receiving the distribution in order to be subject for a rollover however a rollover to a Roth IRA or designated Roth account is generally not a tax free distribution now the Roth IRA is obviously different than a traditional IRA you can see they're kind of reversed they're kind of the opposites of each other so if you're taking money out of some kind of IRA that's a traditional type of IRA or retirement a plan account of 401k or something like that that's under the umbrella of the rules that are related to like a general retirement account where you got the benefit upfront and then you're going to be paying taxes at the end you can't roll it over into a Roth which is like reversed and then act like it's the same thing like you just rolled it over because it's not the same thing it's not the same kind of umbrella that you're rolling it into so use lines 5a and 5b to report a rollover including direct rollover from one qualified employer's plan to another or to an IRA or CEP so the IRA or CEP is the similar kind of thing that you might have so if you were to leave an employer and you're not going to another employer that has a retirement plan maybe you're going to your own business you're doing a sole proprietorship well then you don't you may not have a 401k where can you roll it over to well the similar thing if you're not with another employer would be with an IRA or possibly you could set up a CEP you know you have a CEP either with an employer or you set up your own with your with your business like a Schedule C business sole proprietorship for example so enter online 5a the distribution form 1099 box 1 from this amount subtract any contributions usually shown in box 5 that were taxable to you when made from that result subtract the amount of the rollover enter the remaining amount online 5b if the remaining amount is 0 and you have no other distributions to report online 5b enter 0 online 5b also enter rollover next to line 5b see publication 575 for more details on rollovers including special rules that apply to rollovers from designated Roth accounts partial rollovers of property and distributions under qualified domestic relations orders lump sum distributions if you received a lump sum distribution from a profit sharing or retirement plan for your form 1099 or should have the quote total distribution in quote box in box to be checked you may owe an additional tax if you received an early distribution from a qualified retirement plan and the total amount wasn't rollover so that's where be careful for details see the instructions for schedule 2 line 6 enter the total distribution online 5a and the tax report online 5b for details you can see publication 575