 Income tax 2023-2024, IRA distributions. Get ready and some coffee because we need some inspiration about income tax preparation. 2023-2024. Most of this information can be found in the line instructions section of the Form 1040 Instructions Tax Year 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one income. Remembering the first half of the income tax formula is kind of like a strange income statement, and income statement typically having income minus expenses resulting in net income. Our formula here having income minus various deductions resulting in taxable income. With the income line item for taxes, we typically want it as low as possible, so we're looking and hoping to find things that we can exclude from income, lowering the taxable income, generally lowering the tax that would be due or calculated. Also, we might have certain items in income that could be subject to different tax rates other than ordinary income, usually favorable rates such as qualified dividends, for example, or possibly long-term capital gains. This is the first page of the Form 1040. We're looking now at IRA distributions, which can be found on line four. So, IRA distributions. Let's first just think about what the IRA distributions are, the tax incentives related to them, and then how we're going to be populating them on the tax return, noting that usually we're going to get a form that will provide us information about the IRA distributions, making it easy for us to populate that information on the tax return, but we want to understand what we're doing on the tax return in the event that there's an error or something, so we're more likely to catch it and be able to advise people and talk to people about the IRA and how they're being taxed and possibly in more advanced settings help with some tax planning type of situations. IRA contributions often being a big part of tax planning even on the low income side of things. So, note what the government is trying to do is they're trying to force people, incentivize people to save for retirement, so they're trying to nudge us. How could they nudge us to do certain things? They will typically use the tax code to do that, so they're going to say, hey, you can get a tax break if you basically save for retirement in the format we want you to do it. Well, how can they give you the tax break? They can say, if you put your money into this under the umbrella of an IRA, and we'll talk about other types of retirement plans later, like 401K plans, 403B plans have a similar concept, if you put your investments under that umbrella, we're going to give you a tax benefit such as a tax deferral until retirement when you can pull that money out, and possibly we will force you to pull the money out at that point in time, possibly. Now, one thing to note is that an IRA is not like some special type of investment. The government didn't come up with a new tool. Sometimes people think of an IRA as if it's not just normal investments usually in mutual funds, but no, normally you're going to start an account in investing in, say, mutual funds, which are going to be pooling money together, and you might have a target fund for retirement, for example, and then you're just going to put that investment under the umbrella of an IRA or retirement type of account, which is actually not good because it restricts you. It makes it so you can't take the money out of the retirement account even if you want to. You would never do that normally. 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 that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our crunching numbers is my cardio product line. Now, I'm not saying that subscribing to this channel crunching numbers with us will make you thin, fit, and healthy or anything. However, it does seem like it worked for her. Just saying. So, you know, subscribe, hit the bell thing and buy some merchandise so you can make the world a better place by sharing your accounting instruction exercise routine. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com because why would you do that? If I want to take the money out, I'll take the money out, but you're going to do it because the IRS is giving you a tax benefit and that tax benefit usually means that you put the money in and you can remove it from income or record a deduction from it at the point in time you put the money in. It can earn dividend and income, possibly not subject to tax when it is being earned, but when you take the money out at retirement, then it's going to be subject to income taxes, meaning you've got basically this big deferral of when you have to record the income. So, if you're talking about people that are in their working years, they might have W2 income, for example, and then you have questions about them putting money into an IRA. So, they might put money into an IRA or other retirement plan like a 401K or a 403B, which could give you a tax benefit when you put the money in. If you're talking about people in retirement age, then you're talking about them taking the money out so that they can live on it because they're no longer working and they might be actually forced to take the money out in some cases because the government then wants you to pay the tax hopefully while you're still alive, rather than basically trying to give the IRA to an inheritor, which can further complicate the situations given the fact that the IRA has not yet been taxed and won't be taxed until you take it out. All right, so that's the general idea. So, now let's look at lines 4A and 4B, IRA distributions, not contributions. We're not talking about putting money into the IRA, which could result in a deduction possibly or a reduction of income, however you want to think about it. We're talking about taking money out of the IRA, which would typically happen at retirement. So you should receive a Form 1099-R showing the total amount of any distribution from your IRA before income tax or other deductions were withheld. This amount should be shown in Box 1 of Form 1099-R. So that's pretty straightforward. You have people that are in retirement, they're pulling money out of their retirement accounts to live on at that point, and you're going to get the 1099-R reflecting that, and that is typically pretty clear. What's a little bit more confusing for those people are tax-planning strategies, oftentimes, in terms of how much money do they need to pull out, what are their withholdings they're going to need. That becomes a little bit confusing in part because of the government system where they're trying to kind of baby people, in essence, meaning they're trying to make it so they pay their taxes before they even get the money. Like, for example, with the W-2s, typically you fill out the schedule W-4, and then the employer is the one that's forced to take the withholdings. So for our entire lives, we haven't actually paid our own taxes, right? The employer took our money from us and paid our taxes on our behalf, in essence. In retirement, then, it might get a little bit more complex because now we put the money into these retirement accounts which are subject to tax when we take it out. So then we actually have to do more planning than we may have had to do during our working years to determine the money that we're taking out, which is now subject to tax and what are going to be the tax calculations related to taking that money out and how possibly can we reduce the amount of tax that we're going to pay, possibly if we could have some money that's in an account that will be taxed and some money in a Roth IRA or that's outside of an IRA or something like that so that we can take only part of the money that's subject to tax resulting in a lower tax bracket. That kind of planning gets a little bit more complex. So there's a difference between the tax planning strategies and just doing the data input on the tax returns. And again, as tax preparers, what we need to determine is which of those ends do we want to be on? Are we making our money by just cranking out returns? Do we want to try to make more of our money on kind of giving this kind of advice type of thing? Okay, unless otherwise noted in the line 4a and 4b instructions an IRA includes a traditional IRA, Roth IRA, Simplified Employee Pension, SEP IRA, and saving incentive match plan for employees. Alright, so a normal IRA is the normal one where they incentivize you to put money into an IRA and you get a tax benefit when you put the money in and then when you take the money out, that's when you're going to be subject to tax. That is often useful if you're in your working years and you're making the highest money that you're going to make during that time because you would like to get the deduction when you put the money in because the idea would be that your income is the highest point and therefore your marginal tax rates are highest. And so then you get taxed in retirement when your income should be less because you're just taking out the money you need to live on and possibly you have more than one source of funds and therefore you don't need to take out as much money and therefore your tax brackets will be lower. However, sometimes you might be saying, hey, look, my taxes aren't that high right now because I'm not making much money, but I have some money I want to put into an IRA. Or you might be saying, look, the government is spending money like crazy. They're going to be taxing people. By the time I retire, they're going to have to tax people like crazy because it's going to hit the fan at some point and they're going to have to raise taxes. It's just the way it is. So if you think that's the case, then you might say, I'm going to be taxed more in retirement maybe. And therefore what I'd like to do is pay the tax now. And in that case, you might do a Roth IRA. So they're still trying to incentivize you to invest. We can put in a Roth IRA, which means we still pay taxes on the money when we put it in, but it could earn possibly in a tax-free situation on a Roth IRA situation. So that's kind of like the reverse of a normal IRA. The simplified, the SEP is basically kind of like if you worked at a business, the typical plan is a 401k plan. But that's usually for large businesses. If you work for a smaller business, they might set up a SEP, which is less complex than a 401k plan, and then the same idea or concept with a simple. Okay. Except as provided next, leave line for a blank and enter the total distribution from form 1099R, R box one, on line 4B. Okay. Exception one, enter the total distribution on line 4A if you rolled over part or all of the distribution from Roth IRA to another Roth IRA, IRA other than Roth IRA to a qualified plan or another IRA other than a Roth IRA. Okay. So if you get a 1099R, you're restricted from taking the money out, right? So you, because when you put money into an IRA, you're restricted from taking the money out of the IRA until retirement. What happens if you take the money out sooner than retirement? Well, not only will you be subject to tax, which is normal because you weren't subject to tax when you put it in, but you could be hit with a penalty as well. Now, note that the money that's in these retirement accounts are basically under an umbrella that restricts you from taking the money out. But what if you want to move from like, like a Vanguard account to there, because they're doing too much of this woke ESG kind of weird stuff. You're like, I'm out of here, dude. I'm going to some, I'm going to go from there to my bank or something to B of A or whatever. Well, then if, if that happens, then you're going to have to take the money out, but then you would be subject to taxes when you take the money out. But it's like, I don't want to take the money out. I just want to take it out of Vanguard and like BlackRock or something because they're destroying the whole entertainment, all the industry with all this ESG stuff. And I don't want to support that. So you're like, I want to take the money out of there. Well, then possibly you can roll it over because you're not really, you can see you're not violating what the government wants you to do. You're still saving it for retirement. You're just saying, hey, look, I would like to take it from here into another set of funds that are under the umbrella of an IRA. So something like that would be a rollover. So if you're rolling over the money, make sure that it's marked off as a rollover and not as you taking the money out. Otherwise you'll be subject to the taxes and possibly penalties. Now, usually that's fairly easy to do because if you went, if you went from Vanguard to some other or from, I'm not trying to pick too much on them. If you go to someone else, then obviously the new investment company will want your business and will probably help you to roll the money into their system and make sure it's qualified as a rollover, but you just want to make sure that's the case. Now, if you go from one job to another job, you want to be careful not to just say, hey, I just want to take out my 401k plan, cash it in. Why? Because you'll be subject to taxes and possibly penalties. You might want to roll over your 401k to some other kind of investment that would still be under the umbrella and not trigger a taxable event. Okay. Also enter, quote, rollover, end quote, next to line 4b. This will usually be indicated on the 1099R. So you'll be able to see the type of distribution as a rollover versus a normal distribution. So if the total distribution was a rollover, enter zero on line 4b. If the total distribution wasn't rollover, enter the part not rollover on line 4b, unless exception 2 applies to the part not rollover. Generally, a rollover must be made within 60 days after the day you receive the distribution. So the risky way to do the rollover is to get the distribution and then reinvest the money within kind of like the 60 days. But it would be nice. The easy way to do it would be to go to the new institution and say, I would like you to help me roll the money over so that I'm not getting my hands on it so that you can facilitate the transactions and hopefully it can go from one institution to another institution and they can properly fill out the 1099R, indicating it correctly as a rollover, hopefully. So for more details on rollovers, you can see publication 590A and publication 590B. If you rolled over the distribution into a qualifying plan or you need the rollover in 2024, include a statement explaining what you did. Exception 2, if any of the following apply, enter the total distribution on line 4a and cforms 8606 and its instructions to figure the amount to enter in line 4b. Number 1, you've received a distribution from a Roth, from an IRA other than a Roth IRA and you made non-deductible contributions to any of your traditional IRAs or traditional SEP IRAs for 2023 or an earlier year. If you made non-deductible contributions to these IRAs for 2023, also see publication 590A and 590B. So again, the ideas would be here, is there a way that we can basically take the money out of an IRA and have it not be subject to tax, right? If we pull the money out of the IRA, usually it's going to be subject to tax and possibly penalties have pulled out early and then are there basically exceptions to that rule, the primary one, for example, being the rollover situation. Number 2, you received a distribution from a Roth IRA, but if either A or B below applies into 0 on line 4b, you don't have to see form 8606 or its instructions. A, distribution code T is shown in box 7 of form 1099R and you made a contribution including conversion to a Roth IRA for 2016 or an earlier year. Now, I'm not going to get into these conversions now. There's a whole subject of basically converting from a Roth IRA to a normal IRA. When could that be the case? And the law changes on that. If you want to dive into that in more detail, you can research that further. B, distribution code Q is shown in box 7 of form 1099R. 3, you converted part or all of your traditional IRA, or traditional simple IRA to a Roth IRA in 2023. So again, there's a lot of tax planning that you can kind of dig into on when that might be a useful thing to do to be converting from an IRA to a Roth and so on. So 4, you had a 2022 or 2023 IRA contribution returned to you with the related earnings or less any loss by the due date including extensions of your tax return for that year. Number 5, you made excess contributions to your IRA for an earlier year and have them returned to you in 2023. Number 6, you recharacterized part or all of a contribution to a Roth IRA as a contribution to another type of IRA or vice versa. Exception number 3, if all or part of the distribution is a qualified charitable distribution, a QCD, enter the total distribution online for A. If the total amount distributed is a QCD, qualified charitable distribution, enter zero online for B. So now the question is, well, if I had a distribution, I had money in the IRA and I had a distribution in order to make a charitable distribution, again, could be an area where you could have like tax planning related to that type of situation. So if you want to dig into that idea in more detail, you can dig into more research about it. So if only part of the distribution is a qualified charitable distribution, enter the part that is not a qualified charitable distribution online for B, unless exception 2 applies to that part, enter QCD next to line for B. A qualified charitable distribution is a distribution made directly by the trustee of your IRA other than an ongoing SEP or simple IRA to an organization eligible to receive tax deductible contributions with certain exceptions. You must have been at least age 70 and a half when the distribution was made. So notice when you're 70 and a half, you might be subject then to requirements to take the money out of an IRA. So in other words, you're putting money into an IRA. You also might be putting money into a 401K plan and then you can't take the money out, otherwise you'll be subject to penalties and interest. But at some point the IRS is then going to say, I'm going to force you to take the money out now because now I want you to recognize the income basically hopefully before you die, so they're going to try to figure out how long an average life will be so that you take the money out before you die and then pay taxes on it as you take the money out because you're going to be recording it in income. Well, then you're left with a situation from a planning perspective. Well, what if I don't need to take the money out because I don't want to pay taxes on it? Well, is there something I can do about that? Could I basically contribute it to charity or something like that and possibly do some tax planning strategies to have it go further, right? So that would usually be for older people tax planning that are more well off individuals. So generally your total qualified charitable distribution for a year can't be more than $100,000. This includes any amount up to $50,000 of a one-time QCD to a split interest entity. If you file a joint return, the same rules apply to your spouse. The amount of a QCD is limited to the amount that would otherwise be included in your income. So if your IRA includes non-deductible contributions, the distribution is first considered to be paid out of otherwise taxable income. You can see publication 590B for more details if you want to research that. Exception number four, if all or part of the distribution is a health saving account, HSA funding distribution, enter the total distribution online for A. If the total amount distributed in is an HFD and you had elected to exclude it from income, enter zero online for B. So once again, you have a distribution and now you're saying, well, the distribution usually possibly could be taxable, but what if it's going into the distribution for a health savings account? Another area for possible tax planning that you can drill down on if you wanted to check that one out in more detail, do more research. So if the total amount distributed is an HFD and you held to exclude it from income, enter zero, if only part of the distribution is an HFD and you elect to exclude that part from income, enter the part that isn't an HFD online for B unless exception two applies to that part. So enter HFD next to line for B. And HFD is a distribution made directly by the trustee of your IRA, other than an ongoing SEP or simple IRA to your HSA. If eligible, you can generally elect to exclude an HFD from your income once in your lifetime. So you can't exclude more than the limit and HSA contributions or more than the amount that would otherwise be included in your income. If your IRA includes non-deductible contributions, the HFD is first considered to be paid out of otherwise taxable income. So for that, you can see details on publication 969. So more than one exception applies. So if more than one exception applies include a statement showing the amount of each exception. So now you've got these exceptions. You pull the money out. Usually it'd be subject to income, possibly penalties, but you have one of these exceptions that apply. But now you have more than one exception that are applying that are excluding. Well, you have to tell the IRS that in some ways that might take another note that would have to be attached to the tax return. So if more than one exception applies include a statement showing the amount of each exception instead of making an entry next to line 4B. For example, quote, line 4B, $1,000 rollover, and $500 HFD. But you don't need to attach a statement if only exception two and one other exception apply. So more than one distribution. If you or your spouse of filing jointly received more than one distribution, figure the taxable amount of each distribution and enter the total of the taxable amounts on line 4B. Enter the total amount of those distributions on line 4A. Tip. So you must start receiving at least a minimum amount from your traditional IRA by April 1st of the year following the year you reach age 72. So 72 is the age when, again, the government's going to be saying, now we're going to force you to take money out of the IRA because you've deferred it long enough. We want you to pay taxes on it. They're going to figure out what the average life is from that point and try to make you take the money out before you die so that you can pay the taxes on it before it goes into an inherited type of situation or a state situation. So age 73, if you reach age 72 in 2023, if you don't receive the minimum distribution amount, you may have to pay an additional tax on the amount that should have been distributed. So they could hit you with a pretty hard penalty if you don't take those minimum distributions. So for details, including how to figure the minimum distribution, see publication 590B for information there. And again, notice how confusing this kind of gets for normal taxpayers because for their entire life, they tried to make everything automatic with the W-2 withholdings. You don't even know your paying tax is real. I mean, you know it, but it's just automatically taken out of your paycheck. And then now you've got, actually at the end of your life, when you've been trained not to think about this stuff, it seems like it can get kind of confusing at that point in time. So tax planning can be helpful for many people at that point. So more information. For more information about IRAs, you can see publication 590A and publication 590B.