 Income Tax 2023-2024. Ira Distribution Tax Software Example. Get ready and some coffee because we'll need to handle a little perspiration when doing 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 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 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 forms, schedules, instructions at the IRS website irs.gov, irs.gov, starting with our normal starting point. Adam, tax man, just trying to avoid the dang tax man living in Beverly Hills 90210. It's going to start off with a single file or no dependence W2 income at the 100,000. We have the standard deduction 13,850, getting us to taxable income 86,150. We can mirror that in our Excel worksheet with the tax formula. So we have the 100,000, 13,850, 86,150, and then the tax calculated by the software 14266 which is on page 2 of our 1040, 14266. Let's go back to page 1. We're focused on the income line item once again. This time we're looking at IRA distributions. So we're looking at line 4A and line 4B, page 1 of the Form 1040. The form typically used to express or give this information to us given by the financial institutions to both us and of course the IRS is going to be the 1099R which is distributions from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts, etc. So normally you would be seeing these forms more when you're doing taxes for older individuals. In other words, when you do taxes for people in their working years you expect to see things like W2 forms and whatnot. When people are in their retirement years then you would expect to see more of their income expressed from the 1099R and these are going to be distributions that could be subject to tax because they were not subject to tax when they first put the money in oftentimes if it's a normal IRA situation or like a 401K or other type of retirement plan. Now here we're focused mainly just on the IRA. So if it's an IRA you might see a checkbox down here to indicate that it's going to be an IRA. We've got the gross distribution up top and the taxable amount. Those are going to be the key numbers as well as possibly you can have withholdings from these distributions noting that when you talk about people that are in their working years the primary source of income oftentimes is the W2 and therefore the employer is forced to withhold based on the W4 information provided by the employee to the employer that is then shown on the W2 form. In retirement oftentimes the primary income that people are getting are taking money out of their savings subject to taxes therefore it makes sense to do withholdings here box 4 on the 1099Rs. So that could come into play with tax planning as well. You might have to come up and ask the question of do you want to set up your distributions from your IRAs to have withholdings on them or possibly you can simply set up quarterly payments that somebody can make to try to cover the taxes that you're going to estimate that will be resulting from the withdrawals. Those are kind of some again planning questions that you have to basically take into consideration as opposed to the data input stuff which is usually fairly straightforward driven by the forms. Alright so then you could also have the state withholdings down below as well. So we'll keep it here and we'll say okay let's go to the first page and say we have income now we're going to say it's a pension or IRA income and let's just call it IRA distribution. Now also note that if they're a married couple then you could have, you want to keep it straight between the taxpayer and the spouse because sometimes that could have implications on the tax return even though they're a married couple. So we're single right now so not an issue if I select the dropdown here's going to be the codes that are in place. So number one early distribution no known exception versus early distribution if there is an exception and a normal distribution. If they're past retirement age these are the codes that you might expect to see and say box seven here then and if they're past retirement age you would expect normal distributions and that would comply with their age and that would mean that they're subject to tax but not basically to penalties. If they take the money out before retirement age then you're going to say is it an early distribution no known exceptions which means they'll be subject to tax but they'll also be hit with a penalty or is it going to be an early distribution in which an exception applies in which case that exception might be indicated on the form here which you would hope that it would be but then you could research further exceptions to make sure that you have the exception documented on the return so you cannot include it in income in that situation or possibly included in income but not be subject to the penalty for early withdrawal. Alright let's start off by saying they're over the age limit to pull the money out so let's say normal conditions that our taxpayer is let's say 2023 minus let's say like 67 let's do that again 2023 minus 67 so they're going to be like 67 something years old let's say so that's going to be 1956 so now let's say that they don't have any W-2 income they may still but let's say W-2 income no and they're pulling money out from their IRA so now we're going to say this is their primary source of income it's going to be seven normal distribution this is an IRA so I'll check it off as an IRA and then the gross distribution let's say is 70,000 the taxable amount 70,000 so it's not always the case that you're going to have one IRA of course or even a retirement plan if it was like a 401K plan that will be the only source of income in other words it used to be that people worked at the same company for their entire life and then they had a retirement plan with that company like a 401K plan and then in retirement you would expect most of their income would be coming out of the 401K plan so it would be fairly basic but more and more you have multiple people in a family working so you could have husband and wife and they're going to have multiple jobs throughout their life which means they might end up putting money into multiple IRAs, multiple retirement plans and so on and so forth so you might have a bunch of these documents so we'll take a look at that in a second but let's start with one so we're going to say alright what will that look like so now we're going to say nothing's in the W-2 income and then down here we have the IRA distributions and we're looking at just the taxable amount because we said all of it was taxable because we're imagining it was a normal distribution from an IRA which was not subject to tax when they put the money into the IRA is subject to tax when they take the money out of the IRA also note that they bounced me up to a 1040 SR I'm going to go back to the 1040 just so we can see like the normal form that we're used to and then you can kind of see the same construction on the 1040 SR so there's the 70,000, there's the 15,700 because they're over the age limit now so if I go back on over I'm going to say okay this 100,000 let's go to income and I'm going to say they don't have the job and let's add another category down here for the IRA distributions so I'll pull this down and I'm going to say let's say this is going to be IRA distributions and then we'll make this black and white, home tab, font group, let's make it black and white and then I'll make some of it blue for the data input up to here let's say making it blue and then this was going to go so IRA 1 let's just say 70,000 now if there was a non-taxable amount let's put that in our category on the right again and then we can put an explanation if there was any rationale for it being non-taxable but so then I'm going to say this is going to be the total IRA distribution equals the sum I need to put it in the outer column over here equals the sum of this stuff so my total income is now the W2 income I don't have any of that, don't have any of that and all I have is I'm just going to copy this down to here is that IRA so there's the 70,000, pulls over to page 1, there's the 70,000 now they're over the age limit so instead of being single at that number I have to add to it because they're single another 1850 for the standard deduction so now it's that 157 so that means that we're at 54,3 so there's the 54,3 page 2 calculating the tax 7259 and there's the 7259 so that would be the normal kind of process and of course then this number is being determined by how much money they're taking out of the IRA so you have to juggle the problem of what are the required distributions that they might have to take if they're over a certain limit like 72 and then and what do they need to live on and then how much taxes are you going to pay given the amount that you take out of this IRA now also note that if they had some other source of income or savings that they can pull money out of like it would be best if they can live off of 70,000 but pull less out of the IRA because they don't need to so that they can lower the amount of tax possibly so if I'm going to live on 70,000 but I want to pull out half of that 70,000 divided by 2 that would be great because maybe I have 35,000 in a Roth IRA which is not subject to tax possibly when I take it out or it's in another savings account then I can live off of 70,000 but I would only have to pull out of my IRA if I was able to do that 35,000 and then my tax would be of course significantly lower and my tax bracket would be lower because now I'd only be 10 so that's kind of like what you would like to do when you're thinking about how you're going to live in retirement some of the thought process would be well look all of this money is in a fund when I take it out I'm going to be subject to taxes anyway that I can spread that money out while still getting the maximum tax benefits that I could so that when I take the money out in retirement I could take money out so that I have a lower taxable income but you also have to keep in mind when they force you to take the money out which is going to happen after 72 or something okay so then let's say that he was not of age to take the money out and there might be a penalty on this let's go back to saying that his age here is let's say 1977 I was saying and then we're going to say okay well then he took the money out and he didn't have any good reason to take it out because it was under the threshold of a retirement account and 70,000 and so now we're going to say it was an early distribution no known exceptions uh-oh that's not the code we like to see we don't like to see that code in line 7 this often happens when people get a new job and they take the money out of or they quit a job and get a new job or not and then they take the money out of the retirement account and say well I need the money because I don't got a job right now which means it might not be an IRA in that case but similar situation it'd be like a retirement plan but if we go back on over now we've got the 70,000 again and we're still at and now we're at the 13,850 so if I go back on over here I have to change this back to the 13,850 brings us to taxable income 56,150 56,150 tax calculated on page 2 is going to be the 7666 here but then we have an added tax other taxes which is the penalty of the 7,000 so this is coming from schedule 2 so if I look at schedule 2 I can say okay what happened here K-PASO what happened additional tax on IRAs or other tax-favored accounts you can attach form 5329 if required so 5329 is additional taxes on qualified plans and so on and so here it's calculating basically you can see a 10% penalty calculated on it so that's really not good because now I had to pay taxes on it and a penalty of 10% which is fairly hefty penalty so you don't want to do that typically if you pull the money out you want to have a rationale a reason for it now if there's a natural disaster or something then there might be an exception to the rule and so on and you can look into those specific cases otherwise the general idea would be don't pull the money out if you don't have to pull the money out is the general idea now you might be saying okay but what if I want to what if I'm under the age to pull the money out but I noticed that all of my money is in like like Vanguard and BlackRock and they keep on doing this ESG stuff which is ruining the world with this woke craziness like they're paying people to lose money like they're paying Disney to make crappy movies and lose money and like I'm sick of it so I'm contributing to the problem by investing in this ESG stuff so we're like okay what if I roll the money over if it's a rollover then I can basically possibly roll it over to another account that's still under the umbrella without taking the money out this will also be important if one person is going from one job to another job in which case it might not be an IRA in that case but you might have a similar situation where you're trying to roll over what was under the umbrella of a retirement account so that you don't get hit with taxes on it so what you'd like to see in there is a code that says I think it's a G that says it's going to be a rollover direct rollover now that would be the easiest thing to do so in here again you don't want to see the code that's going to say it's an early distribution that you're going to be subject to penalty you'd like your thing to say like G or something which says that it's going to have a direct rollover and that means that you didn't even put your hands on it you just said I went to the new place and I said hey look my old place is doing this crazy SG stuff I just want to invest them they make me money I'm not trying to change the world to go crazy so I want you to and then if they contact the other company then hopefully they can roll over the money directly and properly give you the 1099R reflecting that it's a rollover so that it'll be nice and easily shown on your tax return so now we can see that we have an IRA here and it's going to be a rollover hold on a second still I still have it subject to tax that would mean the taxable amount hopefully would be zero right so now you would think what would this look like gross distribution taxable amount would have zero though and then possibly a code that would say it's a rollover which would be a code G maybe and then I can go back on over and say okay I'll tell the government yeah we had an IRA distribution but it was a rollover which is now being indicated by the software there's four zero over here and no impact on the taxable income in that case alright let's go back to saying that it's a legit distribution and just add some federal withholdings on it so let's say once again that our taxpayer Adam is going to be it's a two thousand twenty three minus like sixty seven so sixty seven years old it's going to be back to like nineteen fifty six and let's say that it's not wages but we go back to our plan here it's a normal distribution now code number seven normal distribution and seventy thousand and then he had taxes withheld of fifteen thousand let's say and so now you withheld taxes on it which is typical often of a ten ninety nine are given the fact that that's your primary source of income possibly so you might in keeping with what many people are used to of having withholdings instead of estimated payments set it up that way I'm going to go back to the ten forty so now of course you've got the the IRA hold on a second I messed up the data input I'm going to say it's all taxable seventy thousand but then we had withholding of fifteen thousand okay so then if we go back on over here's our seventy thousand that pulled over and then our our fifteen seven because they're over the threshold let's mirror that over here seventy thousand plus another of that comes to fifteen seven taxable income of fifty four three hundred so that makes sense fifty four three hundred page two tax seven two five nine so now we're going to say seven two five nine and then we withheld fifteen thousand so now it comes from the ten ninety nine I'm going to add that into my worksheet and say okay we had payments over here I'm going to add another payment so I'm going to let's put it under the w twos so I'm going to add some rows here I'll insert some rows and let's say this is going to be four this is going to be let's just call it well what did we call it over here it's form ten ninety nine we'll just say form ten ninety nine with holdings did it and then we'll add make that black and white black white put some blue stuff here and let's put it down to here bordered and blue and then we're going to say this is from ten ninety nine are was withholding fifteen thousand and then this is going to be the total total form ten ninety nine withholdings summing that up to the outer column and so that's going to be added down in our total and so that pulls into page one of our formula and so now that's the wrong thing here so there it is so there's the fifteen so now we've got the refund seven seven four one seven seven four one alright so that's the general idea now of course if there's any if you have any questions about what's included in some of these boxes like the distribution code you can go to the instructions which you can find on the back of the form or possibly go to the iris website and you can see instructions for box six and you see instructions for required continued and you have your your different items here which could then give you further guidance for more questions going forward that's for the data input side and then if you have people questioning whether they should take the money out or tax planning with regards to taking the money out or putting money into iris then of course you're going to have to drill down on more usually complex planning topics to see what the best strategies would be but at the minimum you probably want to help people to determine how much they're going to pull out next year how to minimize the amount that they would pull out that would be taxable as well as come up with strategies so they don't get hit hard with the mandatory distributions and then what are going to be the tax consequences and how are you going to pay them do you want to take the money out of out of the distributions in the form of withholdings or possibly maybe you can make estimated tax payments to cover that and then if I go back to the first tab you can also kind of if you look at this drop down you can see early distribution disability, death prohibition, transactions these codes can give you some insight as to some of the things that might be exceptions for the general rule and of course you can do more research if someone needs to take money out what would be some exceptions to the general rule whether it's going to be taxable or subject to penalty so those are two different things taxable it's going to be taxable most likely but it's subject to a penalty if you pull it out early and then you want to make sure that whatever you do if you're trying to pull money out that the financial institution is clear and puts the proper code on the 1099R so that the IRS has on their end from the financial institution which hopefully eliminates or indicates that you're not subject to a penalty