Lesson 11

Pensions and Other Retirement Income

Objectives

• Determine the taxable portion of different types of retirement income

• Determine how to report different types of retirement income on the tax return

• Explain when a minimum distribution is required

• Determine when an adjustment to withholding should be made

Intake/Interview Process

Form 13614 – Intake and Interview Sheet - Income Section

Pensions and Annuities

• Pension• Annuity• Qualified Employee Plan• 401(k) Plan

Taxable Portion of Retirement Income

• Fully Taxable• No basis (employee contribution) in the

plan• All distributions are included in taxable

income

• Partially Taxable• Basis or cost in the plan• Only the taxable portion of the distribution

is included in taxable income

Determining Taxable Retirement Income

• The General Rule• The Simplified Method

−Based on total basis or cost in the plan and total anticipated monthly payments

−Use Simplified Method Worksheet−Tax-free portion of each payment

does not change, once computed

Reporting the Income

1040 1040AIRA Line 15 11Pension Line 16 12Annuity Line 16 12Social Security Line 20 14Railroad-Tier 1 Line 20 14Railroad-Tier 2 Line 16 12

Disability Pension

• Treat as wages until the taxpayer reaches minimum retirement age (report on line 7, Form 1040)

• Treat as pension income once minimum retirement age reached (report on line 16, Form 1040)

Minimum Distributions

• Distributions must begin by the required beginning date

• Must receive entire interest in the plan or minimum required distribution

• Excise tax (50%) imposed on amount not distributed as required

Railroad Retirement

Benefits paid under two categories: • Social Security Equivalent Benefits

(SSEB) − Reported on Form RRB-1099− Treat as social security benefits

• Non-Social Security Equivalent Benefits (NSSEB)

− Reported on Form RRB-1099-R− Treat as pension benefits

Social Security Benefits and Railroad Retirement SSEB

• A portion of Social Security Benefits or Railroad Retirement SSEB may be taxable−Generally up to 50%−Can be up to 85%, if:

• income +½ of benefits exceed base amount or • MFS & lived with your spouse

• Use the Social Security Benefits Worksheet to calculate the taxable benefits

Lump-Sum Social Security Benefit Payments

• Payment can be for current and prior years

• Do not confuse with nontaxable lump-sum death benefits

• Two options to figure taxable portion:− Report all in year received – complete Social

Security Benefits Worksheet− Treat as received in earlier year(s) – refer to

paid preparer

IRA Distributions

• Traditional IRA distributions may be− fully taxable or− partially taxable

• Roth IRA distributions are not taxed (if all requirements are met)

Traditional IRA Distributions

• Taxable as ordinary income in year received• Reported to taxpayer on Form 1099-R• Fully taxable – only deductible contributions• Partially taxable – nondeductible contributions• Required minimum distribution by April 1 of year

following year taxpayer reaches age 70½

Roth IRA Distributions

• Qualified distributions are not taxable• Distribution made after 5-taxable-year

period after Roth was established and−Taxpayer is age 59 ½, or−Taxpayer is disabled, or− To a beneficiary/estate after taxpayer

death, or−To buy, build, or rebuild a 1st home

Pension Withholding & Estimated Tax Payments

• Use W-4P to adjust or change withholding on a pension or annuity

• Estimated tax payments may be required if:−Taxpayer has too little tax withheld−Taxpayer owes more than $1,000 in tax

Quality Review (QR)

Form 8158 – Quality Review Checklist -

Income Section

Lesson Summary

• Pension benefits are fully or partially taxable

• Use Simplified Method Worksheet to determine taxable portion of pension

• Social security benefits may be partially taxable

• Use Social Security Benefits Worksheet to determine taxable portion

Lesson Summary – cont’d

• Traditional IRA distributions may be fully taxable or partially taxable

• Partially taxable IRA distributions are outside the scope of VITA/TCE

• Qualifying Roth IRA distributions are not taxable

• Adjust pension withholding with Form W-4P