 Income Tax 2021-2022 Tax Software Ira Distributions. Get ready to get refunds to that max. Diving in to Income Tax 2021-2022. Here we are in our LASERT Tax Software. You don't need access to the LASERT Tax Software or any tax software to follow along. But you might want the Form 1040 which you can find on the IRS website at irs.gov, irs.gov. Software helping us out to enter the data in different scenarios. Much more quickly jumping on over to the tax forms to see the impact of those scenarios. We're starting off with the single filer Adam Smith. Living in Beverly Hills 90210 100,000 at the W-2 wages standard deduction 12,550 to get us the taxable income 87,450 which we can mirror in our accounting or tax equation. For the income here we've got the standard deduction. There's the 87,450. We then rely on the tax software to calculate the tax on page two which is in this case the 15,15. So we've got the 15,15 here, 15015. Going to go back on over to page one, back up to page one. We're looking at the IRA distributions. As we do this we think of two sides on the IRA, us putting money into the IRA which we often have a tax benefit on. We'll talk about that later. This being us taking money out of the IRA often in terms of when we're at retirement and then it might be something that we have to include in income because we're pulling the money out for the use at that point in time. We got the benefit of possibly a tax benefit when we put the money in. So let's take a look at the actual form. You might get a form something like this or you should from your financial institution if there's going to be a distribution from an IRA. This is going to be the 1099R. So we've got the boxes here. We've got the gross distribution and the taxable amount. These top two boxes are going to be the primary two boxes you're going to be concerned with. Those and box number seven is often going to be an indication of the distribution type that it has and usually they're going to be fairly straightforward distribution types but if you have any unusual distribution you can look at the instructions which you can find on the IRS website and it will break down the different codes that could be in there to list different types of distribution. We'll talk a little bit more about them as we go. Other items, you could have the capital gain included in box two A, the federal income tax withheld. Box four is fairly common or it could be more common than you would think for other types of incomes like interest or something like that because if you're talking about someone who is retired they're no longer using their W-2 income for example to have the withholdings. So oftentimes if all their money is coming from distributions then they might have their withholdings coming out of the 1099R similar situation with like a W-2 with the federal withholdings. We then have to put that in the withholdings area. Employee contributions, designated Roth contributions, net unrealized appreciation and employers securities. The distribution code is important. Whether or not it's an irisep or simple could check that off to determine it as an irisep or simple and then eight the other your percentage of total distributions, total employee contributions, and then the state withholdings which you could have state withholdings as well in a similar way as you would see with like a W-2 type of income. So the primary two boxes we're looking at are the gross distributions and that's going to be the distributions that are there. The taxable amount represents the amount of the gross distributions that are taxable. So oftentimes if all the distributions are taxable so for example under a normal kind of condition you have someone that's going to be pulling the money out after the retirement age and there's going to be that taxable component that will be involved. These two numbers might then be the same and you might have a distribution code down here indicating that it's a normal distribution. So in that instance if I go back on over we're going to go to the first tab. We might then say that the age then if it's a normal distribution we would expect them to be in retirement age. So they're going to be usually older in that case. And then we'll go into the distributions. So I'm going to say we have a distribution. I'm going to just call it ira1 here for the distribution and then I'm going to give the code here. So I'm going to say the distribution code if it was a normal distribution would be a 7 generally. And that's what you would find in this box in the code. And if you don't know what that code is you can look at the instructions and then you're going to say okay in the instructions we've got the code number 7 here. So this is box 7 number 7. We've got the normal distribution. So that would be the normal distribution. And then we would expect most likely to have the same number in both box 1 and 2a. So box 1 and 2a. So going back on over I'm going to say let's start with a thousand. Our traditional starting point is going to be the thousand and a thousand in both sides. And then I'll go to my forms here going on over to the forms. And so now we can see we have over here box 1 the 100,000. And then the box down here it went into the pinching. I got to go back on over to the detail. And I'm going to check off the box up top going back into my income. And then I'm going to check off that it was an IRA, SEP, or SIMPLE. IRA, SEP, or SIMPLE which you would see in if I scroll back on over the item here. So right here that's going to give the proper category that's going to be pulling over. So I'm going to go back on over and say okay back to the forms. So there we have it. So now we've got the IRA distributions and we've got the taxable amount of the 1000. That's going to be increasing us to the 101 in the total. So I'm going to go then to let's go to the 1040 because we're over here on the 1040 SR because I changed the age. So but I think the 1040 is easier to look at. So if I go to the 1040 now we have an adjustment to our standard deduction because of the age that I changed as well. So I'm at the 101 and I've got this adjustment of the 14250. So if I go back on over I'm going to say okay let's add the income which is going to be so we'll add it to the income section. So I'm going to go to the income and I'm going to go down here and say that it's going to put it in the same place as like the W2 income. I've added distributions from IRA or pension in a similar fashion here. So we just got our information leaving a little bit of space because we might have multiple items like we might have multiple W2s. And then I'm going to be adding those up starting with the first one at 1000 pulling that on over to the first page. There's our 101 line one of the income and then the standard deduction needs to go up because they're past the retirement age. I'm going to do that by saying this equals the standard here plus the 1007 and that brings us up to that 14250. So they got the 101 14250. So here 101 14250 getting us to the 86750 on the net income 86750. Let's go to page number two page number two where we have the tax calculation at the 14874 and we'll populate that here 14874. So there we have that now you could also have withholdings which is quite likely if you're talking about someone that is retired on the form that would just be right here. Similar to a W2 kind of information easy to do the data input for similar fashion to the W2 but note that it might be a little bit more difficult. In other words you might have some tax planning that would be involved for people that are retired because they don't have the W4. They might have multiple places where they have distributions. So you got to determine how much should be distributed and so on. And if you have multiple different places to make the withholdings on which ones to make the withholdings on and if they don't have the distributions then you might have estimated payment. So there could be some more planning going on but the data inputs usually pretty straightforward once it has been done and you're just entering the data. We just put the federal withholding. Let's say it was 150 going back on over to the forms. That's going to be on page two. There's the 150 that was paid. We can mirror that on our tax return by going over to the payment side. That's going to be mirroring this bottom line the bottom line and I'm going to just add estimates for payments. Not estimates. I'm going to put it up top with the W2 or withholding payments. And so if you're talking about younger people you're probably having W2s here. If you're talking about older people you might not have many W2s and you might be talking more about pension plans and retirement plan type stuff. 150 adding up for the total 150 on down below that pulling on over to the first page of the form 10 4D where we've got the 150 down below. So we had the 14874 on the tax and then the 150 checking that to the tax return 14874 the 150. They also added a penalty here. So we won't deal with the penalty right now for the late payment penalty. So there is that now note you could also have multiple items here that are feeding in. It's quite common to have multiple items feeding in so we could go back on over and say well what if we had two of these things here. What if that happened? I'm going to say the normal distribution code is number 7. It's going to be an IRA. So we'll say it's an IRA and let's say that was 2000 and the taxable amount 2000 and pulling that on over to the forms to the forms. Now we're at the 3000 up top which of course we can simply mirror in our soft in our Excel worksheet as well by going to the income line and saying now we got another one for 2000. Bringing it up to 3000. Page one 103 14 250 standard deduction 88 750 taxable income. There it is line number two or page number two line number 16 15 3 27 15 3 27. So there we have that is going back on over so that looks good. If you let's let's go back to the original now let's go back to the oh to the G original. Let's delete the second one. Get that out of there. Get out of there. Get out. And then let's say that let's say that this was a one in this code. That's what we don't want to see early distribution. No known exception that so so this is people do this oftentimes and you and you want to try to advise people not to do this to take money out. If there's no exception because then you'll be subject to the penalty and you'll have to pay interest pay taxes on it. So remember even if they are not even if they have an excuse to take it out even if it's a normal distribution whatever the distribution reason you're going to pay taxes on it because you defer the taxes when you put it in. But you want to avoid any added penalties on taking the money out. And so if there's no reason to take it out you take it out before the retirement age. Let's change the retirement age so that they take it out. So it makes sense to make it 78. And so now we're going to go back on over and say now what happened. So what happened. We got the 100,000 we got the 101 and now they're at the 12 550 because they took the money out and they're under the retirement age at this point in time. There's the 88 450 and then page number two. We got this $100 other taxes including self employment tax schedule one and so on. Let's see where that was put. We're going to go on schedule to schedule number two. There's the additions to an IRA or other tax favored accounts. We're attaching form 5329. Let's check that one out. 5329 is the additional taxes on qualified pensions and other tax favored accounts. So it's an added tax that's being tacked on. That's what we want to avoid doesn't seem too big here because we're talking about a small amount that was taken out. But if you take a large amount out that can be a painful tax that could be a painful tax. And we're trying to avoid the pain. The iris likes to be caused pain. Don't let them fool you with the refunds. They're trying to hit you with a stick and what you're trying to do is avoid it. We're trying to avoid the stick. So if I go back on over say let's bring this back to the O to the G. We're going to say this is back to 1000 and this would be to their before retirement age at the 12 550 then. And then we've got the added tax down here which would be somewhere in this area tax and refunds. So we've got let's say tax credits other taxes. We've got other taxes. Let's put it there. I've got a cell for additional taxes. Let's put it in the additional taxes one right here. So additional taxes alternative minimum tax self-employment tax IRA. So I'm going to put I'm just going to put another here. You might not have this stuff up above because I mess with my worksheet. But I'm just going to put one cell for the additional tax which was the distribution which I could do it this way with a formula. I'm going to say it's equal to that distribution I had times the penalty which I think is 10%. So there's the $100 penalty that pulls in then to here. So there's the $100 bringing the tax up to the 15 427 15 427. So let's mirror this again. We're at the 101 12 550 88 450 page numero uno. So we've got the 88 450 and then page number to let the software calculate the tax at the 15 255 15 255. The $100 then brings it up to the 15 355 and then we paid 150. So that brings it up to the 15 355. There it is. Now the other thing you might see is a rollover a rollover. And so if I roll it over then then then I didn't take it out. So I don't I'm not subject to the penalty or the tax but you might get an information return. So it might just be an information return. And the rollover often designated in here in box seven with a G I believe a G I believe. So we're going to go back on over and say this this is a G there. And you can always look at the instructions to get more detail on those. So I'm going to say they still took it out before the retirement age but they didn't actually take it out. They rolled it over into another Ira. It's still under the umbrella of a retirement plan and I didn't actually get the money. So we still should be good in that case. So for example you might you might want to take this money and if you work at a new job or something like that. You might try to see if you can roll it over into another plan that's under the umbrella of a retirement plan so that you don't have multiple you know of these accounts out there and you can kind of consolidate them without having to take the money out and be charged a penalty and taxes on it. So if I was to do that then notice it designates it as a rollover and it says it's it's a non taxable amount and notice if I was to do that too. I wouldn't have anything in the taxable amount and I wouldn't have anything in the federal income tax here. And that means there would be something in box one but not in box two you would think so and therefore there would be no federal withholding as well. So now it's just an informational thing we're back to the first point just showing that here that it was a rollover. Now if you had a legitimate reason to take the money out before the retirement age and you could look you can look up like a list of those reasons and rationales then you got some reasons down here. Exceptions to the 10% tax age automatic enrollment correct distribution death disability domestic relations education so on and so forth. And if you have questions about these if you're tied on cash because no often at times this happens when people are tied on cash and they're like well wait a second I've got a ton of money. That's in a retirement plan of some kind an IRA or something like that can't I take it out. Well you can but you'd be subject to penalties possibly on it on top of the fact that you'll have to pay taxes on it. So the taxes is fair right it's fair that you kind of have to pay taxes on it because you got to put it in tax free you got the tax benefit when putting it in what you're trying to avoid is the added hit of the penalties. So what you want to do in that case is talk to the broker and I mean talk to you talk to your your financial institution and see if you if you have any of these qualifying factors that possibly could allow you to take the money out early. But you want to make sure to talk to the financial institution so that they can put the appropriate code into the 1099 B so that when the IRS gets this information. They have they have the proper code here in line in the 1099 I'm sorry not the 1099 B the 1099 are I'm looking at the wrong 1099 the proper code and the distribution on line number seven so that it makes things go easy. And even if you have the proper code for an early distribution note that you'll still be subject to the income tax. You won't if it's a rollover if it's a rollover then you didn't really pull the money out and you don't have any tax on it's kind of like keeping it in the same account because it's when it was within another account that's under the umbrella. But if you take it out and use it even if you have an excuse to take it out and use it then you'd still be paying tax on it but you're avoiding hopefully the added penalty would be the name of the game that's what they call the game. If you looked at the button at the box the top of the box that's the name on it because that's the name of the game.