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Hr block free 10. Hr block free   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Hr block free Individual retirement arrangements (IRAs). Hr block free Civil service retirement benefits. Hr block free Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Hr block free How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Hr block free Exclusion not limited to cost. Hr block free Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Hr block free Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Hr block free However, these distributions are taken into account when determining the modified adjusted gross income threshold. Hr block free Distributions from a nonqualified retirement plan are included in net investment income. Hr block free See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Hr block free Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Hr block free For more information, see Designated Roth accounts discussed later. Hr block free Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Hr block free What is not covered in this chapter. Hr block free   The following topics are not discussed in this chapter. Hr block free The General Rule. Hr block free   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Hr block free For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Hr block free For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Hr block free Individual retirement arrangements (IRAs). Hr block free   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Hr block free Civil service retirement benefits. Hr block free    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Hr block free S. Hr block free Civil Service Retirement Benefits. Hr block free Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Hr block free Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Hr block free S. Hr block free Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Hr block free 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Hr block free   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Hr block free Elective deferrals that are designated as Roth contributions are included in your income. Hr block free However, qualified distributions are not included in your income. Hr block free See Publication 575 for more information. Hr block free In-plan rollovers to designated Roth accounts. Hr block free   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Hr block free The rollover of any untaxed amounts must be included in income. Hr block free See Publication 575 for more information. Hr block free More than one program. Hr block free   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Hr block free Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Hr block free Section 457 deferred compensation plans. Hr block free    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Hr block free If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Hr block free You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Hr block free You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Hr block free   Your 457(b) plan may have a designated Roth account option. Hr block free If so, you may be able to roll over amounts to the designated Roth account or make contributions. Hr block free Elective deferrals to a designated Roth account are included in your income. Hr block free Qualified distributions from a designated Roth account are not subject to tax. Hr block free   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Hr block free For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Hr block free   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Hr block free Disability pensions. Hr block free   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Hr block free You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Hr block free Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Hr block free    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Hr block free For information on the credit for the elderly or the disabled, see chapter 33. Hr block free   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Hr block free Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Hr block free    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Hr block free For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Hr block free   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Hr block free Retired public safety officers. Hr block free   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Hr block free See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Hr block free Railroad retirement benefits. Hr block free   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Hr block free For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Hr block free For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Hr block free Withholding and estimated tax. Hr block free   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Hr block free You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Hr block free If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Hr block free   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Hr block free Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Hr block free See Direct rollover option under Rollovers, later. Hr block free   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Hr block free Qualified plans for self-employed individuals. Hr block free   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Hr block free R. Hr block free 10 plans. Hr block free Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Hr block free They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Hr block free    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Hr block free If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Hr block free For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Hr block free Purchased annuities. Hr block free   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Hr block free For more information about the General Rule, get Publication 939. Hr block free Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Hr block free Loans. Hr block free   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Hr block free This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Hr block free This means that you must include in income all or part of the amount borrowed. Hr block free Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Hr block free For details, see Loans Treated as Distributions in Publication 575. Hr block free For information on the deductibility of interest, see chapter 23. Hr block free Tax-free exchange. Hr block free   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Hr block free However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Hr block free See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Hr block free How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Hr block free If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Hr block free If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Hr block free If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Hr block free More than one annuity. Hr block free   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Hr block free If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Hr block free Joint return. Hr block free   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Hr block free Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Hr block free Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Hr block free This includes the amounts your employer contributed that were taxable to you when paid. Hr block free Cost does not include any amounts you deducted or were excluded from your income. Hr block free From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Hr block free 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. Hr block free Designated Roth accounts. Hr block free   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Hr block free Your cost will also include any in-plan Roth rollovers you included in income. Hr block free Foreign employment contributions. Hr block free   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Hr block free See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Hr block free Taxation of Periodic Payments Fully taxable payments. Hr block free   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Hr block free You must report them on your income tax return. Hr block free Partly taxable payments. Hr block free   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Hr block free The rest of the amount you receive is generally taxable. Hr block free You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Hr block free Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Hr block free   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Hr block free Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Hr block free   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Hr block free   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Hr block free Exclusion limit. Hr block free   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Hr block free Once your annuity starting date is determined, it does not change. Hr block free If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Hr block free That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Hr block free Exclusion limited to cost. Hr block free   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Hr block free Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Hr block free This deduction is not subject to the 2%-of-adjusted-gross-income limit. Hr block free Exclusion not limited to cost. Hr block free   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Hr block free If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Hr block free The total exclusion may be more than your cost. Hr block free Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Hr block free For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Hr block free For any other annuity, this number is the number of monthly annuity payments under the contract. Hr block free Who must use the Simplified Method. Hr block free   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Hr block free Guaranteed payments. Hr block free   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Hr block free If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Hr block free How to use the Simplified Method. Hr block free    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Hr block free Single-life annuity. Hr block free    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Hr block free Enter on line 3 the number shown for your age at the annuity starting date. Hr block free Multiple-lives annuity. Hr block free   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Hr block free Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Hr block free   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Hr block free Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Hr block free    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Hr block free Example. Hr block free Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Hr block free Bill's annuity starting date is January 1, 2013. Hr block free The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Hr block free Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Hr block free Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Hr block free Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Hr block free Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Hr block free His completed worksheet is shown in Worksheet 10-A. Hr block free Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Hr block free Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Hr block free The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Hr block free If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Hr block free This deduction is not subject to the 2%-of-adjusted- gross-income limit. Hr block free Worksheet 10-A. Hr block free Simplified Method Worksheet for Bill Smith 1. Hr block free Enter the total pension or annuity payments received this year. Hr block free Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Hr block free 14,400 2. Hr block free Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Hr block free See Cost (Investment in the Contract) , earlier 2. Hr block free 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Hr block free Otherwise, go to line 3. Hr block free         3. Hr block free Enter the appropriate number from Table 1 below. Hr block free But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Hr block free 310     4. Hr block free Divide line 2 by the number on line 3 4. Hr block free 100     5. Hr block free Multiply line 4 by the number of months for which this year's payments were made. Hr block free If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Hr block free Otherwise, go to line 6 5. Hr block free 1,200     6. Hr block free Enter any amounts previously recovered tax free in years after 1986. Hr block free This is the amount shown on line 10 of your worksheet for last year 6. Hr block free -0-     7. Hr block free Subtract line 6 from line 2 7. Hr block free 31,000     8. Hr block free Enter the smaller of line 5 or line 7 8. Hr block free 1,200 9. Hr block free Taxable amount for year. Hr block free Subtract line 8 from line 1. Hr block free Enter the result, but not less than zero. Hr block free Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Hr block free 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Hr block free If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Hr block free     10. Hr block free Was your annuity starting date before 1987? □ Yes. Hr block free STOP. Hr block free Do not complete the rest of this worksheet. Hr block free  ☑ No. Hr block free Add lines 6 and 8. Hr block free This is the amount you have recovered tax free through 2013. Hr block free You will need this number if you need to fill out this worksheet next year 10. Hr block free 1,200 11. Hr block free Balance of cost to be recovered. Hr block free Subtract line 10 from line 2. Hr block free If zero, you will not have to complete this worksheet next year. Hr block free The payments you receive next year will generally be fully taxable 11. Hr block free 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Hr block free . Hr block free . Hr block free before November 19, 1996, enter on line 3. Hr block free . Hr block free . Hr block free after November 18, 1996, enter on line 3. Hr block free . Hr block free . Hr block free 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Hr block free . Hr block free . Hr block free   THEN enter on line 3. Hr block free . Hr block free . Hr block free 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Hr block free Who must use the General Rule. Hr block free   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Hr block free Annuity starting before November 19, 1996. Hr block free   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Hr block free You also had to use it for any fixed-period annuity. Hr block free If you did not have to use the General Rule, you could have chosen to use it. Hr block free If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Hr block free   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Hr block free Who cannot use the General Rule. Hr block free   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Hr block free See Who must use the Simplified Method , earlier. Hr block free More information. Hr block free   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Hr block free Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Hr block free They include all payments other than periodic payments and corrective distributions. Hr block free Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Hr block free Corrective distributions of excess plan contributions. Hr block free   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Hr block free To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Hr block free For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Hr block free Figuring the taxable amount of nonperiodic payments. Hr block free   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Hr block free If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Hr block free If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Hr block free Annuity starting date. Hr block free   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Hr block free Distribution on or after annuity starting date. Hr block free   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Hr block free Distribution before annuity starting date. Hr block free   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Hr block free You exclude from your gross income the part that you allocate to the cost. Hr block free You include the remainder in your gross income. Hr block free   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Hr block free This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Hr block free    Distributions from nonqualified plans are subject to the net investment income tax. Hr block free See the Instructions for Form 8960. Hr block free   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Hr block free Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Hr block free If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Hr block free A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Hr block free A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Hr block free The participant's entire balance from a plan does not include certain forfeited amounts. Hr block free It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Hr block free For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Hr block free If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Hr block free The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Hr block free The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Hr block free You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Hr block free Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Hr block free The tax figured on Form 4972 is added to the regular tax figured on your other income. Hr block free This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Hr block free How to treat the distribution. Hr block free   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Hr block free Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Hr block free Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Hr block free Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Hr block free Roll over all or part of the distribution. Hr block free See Rollovers , later. Hr block free No tax is currently due on the part rolled over. Hr block free Report any part not rolled over as ordinary income. Hr block free Report the entire taxable part of the distribution as ordinary income on your tax return. Hr block free   The first three options are explained in the following discussions. Hr block free Electing optional lump-sum treatment. Hr block free   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Hr block free If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Hr block free Taxable and tax-free parts of the distribution. Hr block free    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Hr block free You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Hr block free Cost. Hr block free   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Hr block free You must reduce this cost by amounts previously distributed tax free. Hr block free Net unrealized appreciation (NUA). Hr block free   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Hr block free (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Hr block free ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Hr block free The amount treated as capital gain is taxed at a 20% rate. Hr block free You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Hr block free Complete Part II of Form 4972 to choose the 20% capital gain election. Hr block free For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Hr block free 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Hr block free You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Hr block free You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Hr block free The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Hr block free You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Hr block free Complete Part III of Form 4972 to choose the 10-year tax option. Hr block free You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Hr block free Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Hr block free Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Hr block free For this purpose, the following plans are qualified retirement plans. Hr block free A qualified employee plan. Hr block free A qualified employee annuity. Hr block free A tax-sheltered annuity plan (403(b) plan). Hr block free An eligible state or local government section 457 deferred compensation plan. Hr block free Eligible rollover distributions. Hr block free   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Hr block free For information about exceptions to eligible rollover distributions, see Publication 575. Hr block free Rollover of nontaxable amounts. Hr block free   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Hr block free The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Hr block free   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Hr block free   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Hr block free To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Hr block free For more information, see the Form 8606 instructions. Hr block free Direct rollover option. Hr block free   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Hr block free If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Hr block free Payment to you option. Hr block free   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Hr block free However, the full amount is treated as distributed to you even though you actually receive only 80%. Hr block free You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Hr block free (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Hr block free )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Hr block free Time for making rollover. Hr block free   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Hr block free (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Hr block free )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Hr block free   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Hr block free Qualified domestic relations order (QDRO). Hr block free   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Hr block free If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Hr block free You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Hr block free See Rollovers in Publication 575 for more information on benefits received under a QDRO. Hr block free Rollover by surviving spouse. Hr block free   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Hr block free The rollover rules apply to you as if you were the employee. Hr block free You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Hr block free For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Hr block free    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Hr block free However, see Rollovers by nonspouse beneficiary next. Hr block free Rollovers by nonspouse beneficiary. Hr block free   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Hr block free The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Hr block free The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Hr block free For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Hr block free Retirement bonds. Hr block free   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Hr block free Designated Roth accounts. Hr block free   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Hr block free If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Hr block free For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Hr block free In-plan rollovers to designated Roth accounts. Hr block free   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Hr block free The rollover of any untaxed amounts must be included in income. Hr block free See Designated Roth accounts under Rollovers in Publication 575 for more information. Hr block free Rollovers to Roth IRAs. Hr block free   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Hr block free   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Hr block free You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Hr block free In addition, the 10% tax on early distributions does not apply. Hr block free More information. Hr block free   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Hr block free Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Hr block free Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Hr block free These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Hr block free These taxes are discussed in the following sections. Hr block free If you must pay either of these taxes, report them on Form 5329. Hr block free However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Hr block free Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Hr block free Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Hr block free This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Hr block free Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Hr block free This tax applies to the part of the distribution that you must include in gross income. Hr block free For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Hr block free 5% rate on certain early distributions from deferred annuity contracts. Hr block free   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Hr block free A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Hr block free On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Hr block free Attach an explanation to your return. Hr block free Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Hr block free   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Hr block free You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Hr block free The additional tax is figured on Form 5329. Hr block free For more information, see Form 5329 and its instructions. Hr block free For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Hr block free Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Hr block free   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Hr block free You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Hr block free The additional tax is figured on Form 5329. Hr block free For more information, see Form 5329 and its instructions. Hr block free For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Hr block free Exceptions to tax. Hr block free    Certain early distributions are excepted from the early distribution tax. Hr block free If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Hr block free If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Hr block free Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Hr block free On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Hr block free    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Hr block free Enter exception number “12” on line 2. Hr block free General exceptions. Hr block free   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Hr block free Additional exceptions for qualified retirement plans. Hr block free   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Hr block free 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Hr block free See Pub. Hr block free 721 for more information on the phased retirement program. Hr block free Qualified public safety employees. Hr block free   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Hr block free You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Hr block free Qualified reservist distributions. Hr block free   A qualified reservist distribution is not subject to the additional tax on early distributions. Hr block free A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Hr block free You must have been ordered or called to active duty after September 11, 2001. Hr block free For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Hr block free Additional exceptions for nonqualified annuity contracts. Hr block free   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Hr block free Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Hr block free The payments each year cannot be less than the required minimum distribution. Hr block free Required distributions not made. Hr block free   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Hr block free The tax equals 50% of the part of the required minimum distribution that was not distributed. Hr block free   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Hr block free Waiver. Hr block free   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Hr block free See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Hr block free State insurer delinquency proceedings. Hr block free   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Hr block free If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Hr block free Under certain conditions, you will not have to pay the 50% excise tax. Hr block free Required beginning date. Hr block free   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Hr block free However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Hr block free   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Hr block free Your required distribution then must be made for 2014 by December 31, 2014. Hr block free 5% owners. Hr block free   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Hr block free   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Hr block free Age 70½. Hr block free   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Hr block free   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Hr block free If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Hr block free Required distributions. Hr block free   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Hr block free Additional information. Hr block free   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Hr block free Form 5329. Hr block free   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Hr block free Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Hr block free However, some special rules apply. Hr block free See Publication 575 for more information. Hr block free Survivors of employees. Hr block free   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Hr block free You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Hr block free Survivors of retirees. Hr block free   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Hr block free If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Hr block free    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Hr block free The resulting tax-free amount will then remain fixed. Hr block free Any increases in the survivor annuity are fully taxable. Hr block free    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Hr block free This amount remains fixed even if the annuity payments are increased or decreased. Hr block free See Simplified Method , earlier. Hr block free   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Hr block free Estate tax deduction. Hr block free   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Hr block free You can deduct the part of the total estate tax that was based on the annuity. Hr block free The deceased annuitant must have died after the annuity starting date. Hr block free (For details, see section 1. Hr block free 691(d)-1 of the regulations. Hr block free ) Deduct it in equal amounts over your remaining life expectancy. Hr block free   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Hr block free   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Hr block free This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Hr block free See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Hr block free Prev  Up  Next   Home   More Online Publications
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Hr block free 5. Hr block free   Illustrated Examples Table of Contents Illustrated Example of Form 4563Line 1. Hr block free Line 2. Hr block free Lines 3a and 3b. Hr block free Lines 4a and 4b. Hr block free Line 5. Hr block free Line 6. Hr block free Line 7. Hr block free Line 9. Hr block free Line 15. Hr block free Illustrated Example of Form 5074Part I. Hr block free Part II. Hr block free Part III. Hr block free Illustrated Example of Form 8689Part I. Hr block free Part II. Hr block free Part III. Hr block free Part IV. Hr block free Use the following examples to help you complete the correct attachment to your Form 1040. Hr block free The completed form for each example is shown on the pages that follow. Hr block free Illustrated Example of Form 4563 John Black is a U. Hr block free S. Hr block free citizen, single, and under 65. Hr block free He was a bona fide resident of American Samoa during all of 2013. Hr block free John must file Form 1040 because his gross income from sources outside the possessions ($10,000 of dividends from U. Hr block free S. Hr block free corporations) is more than his adjusted filing requirement for single filers under 65. Hr block free (See Filing Requirement if Possession Income Is Excluded in chapter 4. Hr block free ) Because he must file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of income from American Samoa he can exclude. Hr block free See Bona Fide Resident of American Samoa in chapter 3. Hr block free Completing Form 4563. Hr block free   John enters his name and social security number at the top of the form. Hr block free Line 1. Hr block free   On Form 4563 (see later), John enters the date his bona fide residence began in American Samoa, June 2, 2012. Hr block free Because he is still a bona fide resident, he enters “not ended” in the second blank space. Hr block free Line 2. Hr block free   He checks the box labeled “Rented house or apartment” to describe his type of living quarters in American Samoa. Hr block free Lines 3a and 3b. Hr block free   He checks “No” on line 3a because no family members lived with him. Hr block free He leaves line 3b blank. Hr block free Lines 4a and 4b. Hr block free   He checks “No” on line 4a because he did not maintain a home outside American Samoa. Hr block free He leaves line 4b blank. Hr block free Line 5. Hr block free   He enters the name and address of his employer, Samoa Products Co. Hr block free It is a private American Samoa corporation. Hr block free Line 6. Hr block free   He enters the dates of his 2-week vacation to New Zealand from November 11 to November 25. Hr block free That was his only trip outside American Samoa during the year. Hr block free Line 7. Hr block free   He enters the $24,000 in wages he received from Samoa Products Co. Hr block free Line 9. Hr block free   He received $220 in dividends from an American Samoa corporation, which he enters here. Hr block free He also received $10,000 of dividends from a U. Hr block free S. Hr block free corporation, but he will enter that amount only on his Form 1040 because the U. Hr block free S. Hr block free dividends do not qualify for the possession exclusion. Hr block free Line 15. Hr block free   John totals the amounts on lines 7 and 9 to get the amount he can exclude from his gross income in 2013. Hr block free He will not enter his excluded income on Form 1040. Hr block free However, he will attach his completed Form 4563 to his Form 1040. Hr block free Illustrated Example of Form 5074 Tracy Grey is a U. Hr block free S. Hr block free citizen who is a self-employed fisheries consultant with a tax home in New York. Hr block free Her only income for 2013 was net self-employment income of $80,000. Hr block free Of the $80,000, $20,000 was from consulting work in Guam and the rest was earned in the United States. Hr block free Thinking she would owe tax to Guam on the $20,000, Tracy made estimated tax payments of $1,409 to Guam. Hr block free She was not a bona fide resident of Guam during 2013. Hr block free Tracy completes Form 1040 (not illustrated), reporting her worldwide income. Hr block free Because the adjusted gross income on her Form 1040 was $50,000 or more and at least $5,000 of her gross income is from Guam, Tracy must file Form 5074 with her Form 1040. Hr block free All amounts reported on Form 5074 are also reported on her Form 1040. Hr block free See U. Hr block free S. Hr block free Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam) in chapter 3. Hr block free Completing Form 5074. Hr block free   Tracy enters her name and social security number at the top of the form. Hr block free Part I. Hr block free   On Form 5074 (see later), Tracy enters her self-employment income from Guam ($20,000) on line 6. Hr block free She has no other income from Guam, so the total on line 16 is $20,000. Hr block free Part II. Hr block free   Tracy's only adjustment in Part II is the deductible part of the self-employment tax on her net income earned in Guam. Hr block free She enters $1,413 on line 21 and line 28. Hr block free Her adjusted gross income on line 29 is $18,587. Hr block free Part III. Hr block free   Tracy made estimated tax payments of $1,409. Hr block free She enters this amount on line 30, and again on line 34 as the total payments. Hr block free Illustrated Example of Form 8689 Juan and Carla Moreno live and work in the United States. Hr block free In 2013, they received $14,400 in income from the rental of a condominium they own in the U. Hr block free S. Hr block free Virgin Islands (USVI). Hr block free The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. Hr block free They were not bona fide residents of the USVI during the entire tax year. Hr block free The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). Hr block free The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents. Hr block free The Morenos also complete Form 8689 to determine how much of their U. Hr block free S. Hr block free tax shown on Form 1040, line 61 (with certain adjustments), must be paid to the U. Hr block free S. Hr block free Virgin Islands. Hr block free See U. Hr block free S. Hr block free Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3. Hr block free The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service. Hr block free At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. Hr block free The Virgin Islands Bureau of Internal Revenue will process this copy. Hr block free Completing Form 8689. Hr block free   Juan and Carla enter their names and Juan's social security number at the top of the form. Hr block free Part I. Hr block free   The Morenos enter their income from the USVI in Part I (see later). Hr block free The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. Hr block free The Morenos' total USVI income of $6,700 is entered on line 16. Hr block free Part II. Hr block free   The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. Hr block free Their USVI adjusted gross income (AGI) is $6,700. Hr block free Part III. Hr block free   On line 30, the Morenos enter the amount from Form 1040, line 61 ($4,539). Hr block free Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,539 on line 32. Hr block free   The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. Hr block free Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0. Hr block free 122) and enter that as a decimal on line 34. Hr block free They then apply that percentage to the U. Hr block free S. Hr block free tax entered on line 32 to find the amount of U. Hr block free S. Hr block free tax allocated to USVI income ($4,539 x 0. Hr block free 122 = $554), and enter that amount on line 35. Hr block free Part IV. Hr block free   Part IV is used to show payments of income tax to the USVI only. Hr block free The Morenos had no tax withheld by the U. Hr block free S. Hr block free Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. Hr block free They include this amount ($400) in the total payments on Form 1040, line 72. Hr block free On the dotted line next to the entry space for line 72, they enter “Form 8689” and show the amount. Hr block free The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 72, for the tax paid to the USVI. Hr block free   The income tax they owe to the USVI ($154) is shown on Form 8689, line 44. Hr block free They enter this amount on line 45. Hr block free They also include this additional amount ($154) on the dotted line next to the entry space and in the total on Form 1040, line 72. Hr block free The Morenos will pay their USVI tax at the same time they file the copy of their U. Hr block free S. Hr block free income tax return with the U. Hr block free S. Hr block free Virgin Islands. Hr block free This image is too large to be displayed in the current screen. Hr block free Please click the link to view the image. Hr block free Form 4563, page 1 for John Black This image is too large to be displayed in the current screen. Hr block free Please click the link to view the image. Hr block free Form 5074, for Tracy Grey This image is too large to be displayed in the current screen. Hr block free Please click the link to view the image. Hr block free Form 8689, page 1 for Juan and Carla Moreno Prev  Up  Next   Home   More Online Publications