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Taxslayer 2011

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Taxslayer 2011

Taxslayer 2011 9. Taxslayer 2011   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Taxslayer 2011 Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Taxslayer 2011 Amount to report as ordinary income. Taxslayer 2011 Applicable percentage. Taxslayer 2011 Amount to report as ordinary income. Taxslayer 2011 Applicable percentage. Taxslayer 2011 Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Taxslayer 2011 When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Taxslayer 2011 Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Taxslayer 2011 Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Taxslayer 2011 Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Taxslayer 2011 Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Taxslayer 2011 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Taxslayer 2011 Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Taxslayer 2011 Table 9-1. Taxslayer 2011 Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Taxslayer 2011 Held 24 mos. Taxslayer 2011  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Taxslayer 2011 Held 12 mos. Taxslayer 2011   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Taxslayer 2011 Do not take that gain into account as section 1231 gain. Taxslayer 2011 Section 1231 transactions. Taxslayer 2011   Gain or loss on the following transactions is subject to section 1231 treatment. Taxslayer 2011 Sale or exchange of cattle and horses. Taxslayer 2011 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Taxslayer 2011 Sale or exchange of other livestock. Taxslayer 2011 This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Taxslayer 2011 Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Taxslayer 2011 Other livestock does not include poultry. Taxslayer 2011 Sale or exchange of depreciable personal property. Taxslayer 2011 This property must be used in your business and held longer than 1 year. Taxslayer 2011 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Taxslayer 2011 Examples of depreciable personal property include farm machinery and trucks. Taxslayer 2011 It also includes amortizable section 197 intangibles. Taxslayer 2011 Sale or exchange of real estate. Taxslayer 2011 This property must be used in your business and held longer than 1 year. Taxslayer 2011 Examples are your farm or ranch (including barns and sheds). Taxslayer 2011 Sale or exchange of unharvested crops. Taxslayer 2011 The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Taxslayer 2011 You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Taxslayer 2011 Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Taxslayer 2011 Distributive share of partnership gains and losses. Taxslayer 2011 Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Taxslayer 2011 Cutting or disposal of timber. Taxslayer 2011 Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . Taxslayer 2011 Condemnation. Taxslayer 2011 The condemned property (defined in chapter 11) must have been held longer than 1 year. Taxslayer 2011 It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Taxslayer 2011 It cannot be property held for personal use. Taxslayer 2011 Casualty or theft. Taxslayer 2011 The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Taxslayer 2011 You must have held the property longer than 1 year. Taxslayer 2011 However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Taxslayer 2011 Section 1231 does not apply to personal casualty gains and losses. Taxslayer 2011 See chapter 11 for information on how to treat those gains and losses. Taxslayer 2011 If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Taxslayer 2011 See Table 9-1. Taxslayer 2011 Property for sale to customers. Taxslayer 2011   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Taxslayer 2011 If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Taxslayer 2011 Treatment as ordinary or capital. Taxslayer 2011   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Taxslayer 2011 If you have a net section 1231 loss, it is an ordinary loss. Taxslayer 2011 If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Taxslayer 2011 The rest, if any, is long-term capital gain. Taxslayer 2011 Nonrecaptured section 1231 losses. Taxslayer 2011   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. Taxslayer 2011 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Taxslayer 2011 Example. Taxslayer 2011 In 2013, Ben has a $2,000 net section 1231 gain. Taxslayer 2011 To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Taxslayer 2011 From 2008 through 2012 he had the following section 1231 gains and losses. Taxslayer 2011 Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Taxslayer 2011 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Taxslayer 2011 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Taxslayer 2011 To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Taxslayer 2011 For more information, see chapter 3 of Publication 544. Taxslayer 2011 Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Taxslayer 2011 Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Taxslayer 2011 See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Taxslayer 2011 Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Taxslayer 2011 Personal property (either tangible or intangible). Taxslayer 2011 Other tangible property (except buildings and their structural components) used as any of the following. Taxslayer 2011 See Buildings and structural components below. Taxslayer 2011 An integral part of manufacturing, production, or extraction, or of furnishing certain services. Taxslayer 2011 A research facility in any of the activities in (a). Taxslayer 2011 A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Taxslayer 2011 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Taxslayer 2011 Amortization of certified pollution control facilities. Taxslayer 2011 The section 179 expense deduction. Taxslayer 2011 Deduction for clean-fuel vehicles and certain refueling property. Taxslayer 2011 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Taxslayer 2011 Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Taxslayer 2011 Single purpose agricultural (livestock) or horticultural structures. Taxslayer 2011 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Taxslayer 2011 Buildings and structural components. Taxslayer 2011   Section 1245 property does not include buildings and structural components. Taxslayer 2011 The term building includes a house, barn, warehouse, or garage. Taxslayer 2011 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Taxslayer 2011   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Taxslayer 2011 Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Taxslayer 2011   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Taxslayer 2011 Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Taxslayer 2011 Facility for bulk storage of fungible commodities. Taxslayer 2011   This is a facility used mainly for the bulk storage of fungible commodities. Taxslayer 2011 Bulk storage means storage of a commodity in a large mass before it is used. Taxslayer 2011 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Taxslayer 2011 To be fungible, a commodity must be such that one part may be used in place of another. Taxslayer 2011 Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Taxslayer 2011 The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Taxslayer 2011 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Taxslayer 2011 For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Taxslayer 2011 For details, see chapter 3 of Publication 544. Taxslayer 2011 Use Part III of Form 4797 to figure the ordinary income part of the gain. Taxslayer 2011 Depreciation claimed on other property or claimed by other taxpayers. Taxslayer 2011   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Taxslayer 2011 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Taxslayer 2011 For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Taxslayer 2011 Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). Taxslayer 2011 Example. Taxslayer 2011 Jeff Free paid $120,000 for a tractor in 2012. Taxslayer 2011 On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Taxslayer 2011 To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Taxslayer 2011 Jeff can also depreciate the additional $30,000 for the chopper. Taxslayer 2011 Depreciation and amortization. Taxslayer 2011   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Taxslayer 2011 See Depreciation Recapture in chapter 3 of Publication 544 for more details. Taxslayer 2011 Ordinary depreciation deductions. Taxslayer 2011 Section 179 deduction (see chapter 7). Taxslayer 2011 Any special depreciation allowance. Taxslayer 2011 Amortization deductions for all the following costs. Taxslayer 2011 Acquiring a lease. Taxslayer 2011 Lessee improvements. Taxslayer 2011 Pollution control facilities. Taxslayer 2011 Reforestation expenses. Taxslayer 2011 Section 197 intangibles. Taxslayer 2011 Qualified disaster expenses. Taxslayer 2011 Franchises, trademarks, and trade names acquired before August 11, 1993. Taxslayer 2011 Example. Taxslayer 2011 You file your returns on a calendar year basis. Taxslayer 2011 In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Taxslayer 2011 You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Taxslayer 2011 You did not claim the section 179 expense deduction for the truck. Taxslayer 2011 You sold it in May 2013 for $7,000. Taxslayer 2011 The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Taxslayer 2011 Figure the gain treated as ordinary income as follows. Taxslayer 2011 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Taxslayer 2011   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Taxslayer 2011 If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Taxslayer 2011 If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Taxslayer 2011 This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Taxslayer 2011 Disposition of plants and animals. Taxslayer 2011   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Taxslayer 2011 If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Taxslayer 2011 For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Taxslayer 2011 For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Taxslayer 2011 You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Taxslayer 2011 Example. Taxslayer 2011 Janet Maple sold her apple orchard in 2013 for $80,000. Taxslayer 2011 Her adjusted basis at the time of sale was $60,000. Taxslayer 2011 She bought the orchard in 2006, but the trees did not produce a crop until 2009. Taxslayer 2011 Her pre-productive expenses were $6,000. Taxslayer 2011 She elected not to use the uniform capitalization rules. Taxslayer 2011 Janet must treat $6,000 of the gain as ordinary income. Taxslayer 2011 Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Taxslayer 2011 It includes buildings and structural components that are not section 1245 property (discussed earlier). Taxslayer 2011 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Taxslayer 2011 A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Taxslayer 2011 Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Taxslayer 2011 To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Taxslayer 2011 You will not have additional depreciation if any of the following apply to the property disposed of. Taxslayer 2011 You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. Taxslayer 2011 You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Taxslayer 2011 The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Taxslayer 2011 These properties are depreciated using the straight line method. Taxslayer 2011 Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Taxslayer 2011 This applies even if no payments are received in that year. Taxslayer 2011 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Taxslayer 2011 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Taxslayer 2011 If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Taxslayer 2011 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Taxslayer 2011 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Taxslayer 2011 For more information on installment sales, see chapter 10. Taxslayer 2011 Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Taxslayer 2011 By gift. Taxslayer 2011 At death. Taxslayer 2011 In like-kind exchanges. Taxslayer 2011 In involuntary conversions. Taxslayer 2011 Publication 544 also explains how to handle a single transaction involving multiple properties. Taxslayer 2011 Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Taxslayer 2011 Deductions for soil and water conservation expenditures (section 1252 property). Taxslayer 2011 Exclusions from income for certain cost sharing payments (section 1255 property). Taxslayer 2011 Section 1252 property. Taxslayer 2011   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Taxslayer 2011 Exceptions. Taxslayer 2011   Do not treat gain on the following transactions as gain on section 1252 property. Taxslayer 2011 Disposition of farmland by gift. Taxslayer 2011 Transfer of farm property at death (except for income in respect of a decedent). Taxslayer 2011 For more information, see Regulations section 1. Taxslayer 2011 1252-2. Taxslayer 2011 Amount to report as ordinary income. Taxslayer 2011   You report as ordinary income the lesser of the following amounts. Taxslayer 2011 Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Taxslayer 2011 The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Taxslayer 2011 Applicable percentage. Taxslayer 2011   The applicable percentage is based on the length of time you held the land. Taxslayer 2011 If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Taxslayer 2011 If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Taxslayer 2011 If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Taxslayer 2011 Example. Taxslayer 2011 You acquired farmland on January 19, 2005. Taxslayer 2011 On October 3, 2013, you sold the land at a $30,000 gain. Taxslayer 2011 Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Taxslayer 2011 The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Taxslayer 2011 You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Taxslayer 2011 Section 1255 property. Taxslayer 2011   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Taxslayer 2011 If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Taxslayer 2011 Amount to report as ordinary income. Taxslayer 2011   You report as ordinary income the lesser of the following amounts. Taxslayer 2011 The applicable percentage of the total excluded cost-sharing payments. Taxslayer 2011 The gain on the disposition of the property. Taxslayer 2011 You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Taxslayer 2011 However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Taxslayer 2011 Applicable percentage. Taxslayer 2011   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Taxslayer 2011 If the property is held less than 10 years after you receive the payments, the percentage is 100%. Taxslayer 2011 After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Taxslayer 2011 Form 4797, Part III. Taxslayer 2011   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. Taxslayer 2011 Prev  Up  Next   Home   More Online Publications
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The Taxslayer 2011

Taxslayer 2011 10. Taxslayer 2011   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Taxslayer 2011 Individual retirement arrangements (IRAs). Taxslayer 2011 Civil service retirement benefits. Taxslayer 2011 Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Taxslayer 2011 How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Taxslayer 2011 Exclusion not limited to cost. Taxslayer 2011 Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Taxslayer 2011 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). Taxslayer 2011 However, these distributions are taken into account when determining the modified adjusted gross income threshold. Taxslayer 2011 Distributions from a nonqualified retirement plan are included in net investment income. Taxslayer 2011 See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Taxslayer 2011 Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Taxslayer 2011 For more information, see Designated Roth accounts discussed later. Taxslayer 2011 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. Taxslayer 2011 What is not covered in this chapter. Taxslayer 2011   The following topics are not discussed in this chapter. Taxslayer 2011 The General Rule. Taxslayer 2011   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Taxslayer 2011 For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Taxslayer 2011 For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Taxslayer 2011 Individual retirement arrangements (IRAs). Taxslayer 2011   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Taxslayer 2011 Civil service retirement benefits. Taxslayer 2011    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Taxslayer 2011 S. Taxslayer 2011 Civil Service Retirement Benefits. Taxslayer 2011 Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Taxslayer 2011 Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Taxslayer 2011 S. Taxslayer 2011 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. Taxslayer 2011 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Taxslayer 2011   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. Taxslayer 2011 Elective deferrals that are designated as Roth contributions are included in your income. Taxslayer 2011 However, qualified distributions are not included in your income. Taxslayer 2011 See Publication 575 for more information. Taxslayer 2011 In-plan rollovers to designated Roth accounts. Taxslayer 2011   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. Taxslayer 2011 The rollover of any untaxed amounts must be included in income. Taxslayer 2011 See Publication 575 for more information. Taxslayer 2011 More than one program. Taxslayer 2011   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. Taxslayer 2011 Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Taxslayer 2011 Section 457 deferred compensation plans. Taxslayer 2011    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. Taxslayer 2011 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. Taxslayer 2011 You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Taxslayer 2011 You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Taxslayer 2011   Your 457(b) plan may have a designated Roth account option. Taxslayer 2011 If so, you may be able to roll over amounts to the designated Roth account or make contributions. Taxslayer 2011 Elective deferrals to a designated Roth account are included in your income. Taxslayer 2011 Qualified distributions from a designated Roth account are not subject to tax. Taxslayer 2011   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Taxslayer 2011 For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Taxslayer 2011   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Taxslayer 2011 Disability pensions. Taxslayer 2011   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. Taxslayer 2011 You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Taxslayer 2011 Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Taxslayer 2011    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Taxslayer 2011 For information on the credit for the elderly or the disabled, see chapter 33. Taxslayer 2011   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Taxslayer 2011 Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Taxslayer 2011    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. Taxslayer 2011 For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Taxslayer 2011   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Taxslayer 2011 Retired public safety officers. Taxslayer 2011   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. Taxslayer 2011 See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Taxslayer 2011 Railroad retirement benefits. Taxslayer 2011   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. Taxslayer 2011 For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Taxslayer 2011 For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Taxslayer 2011 Withholding and estimated tax. Taxslayer 2011   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. Taxslayer 2011 You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Taxslayer 2011 If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Taxslayer 2011   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Taxslayer 2011 Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Taxslayer 2011 See Direct rollover option under Rollovers, later. Taxslayer 2011   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Taxslayer 2011 Qualified plans for self-employed individuals. Taxslayer 2011   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Taxslayer 2011 R. Taxslayer 2011 10 plans. Taxslayer 2011 Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Taxslayer 2011 They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Taxslayer 2011    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Taxslayer 2011 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. Taxslayer 2011 For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Taxslayer 2011 Purchased annuities. Taxslayer 2011   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. Taxslayer 2011 For more information about the General Rule, get Publication 939. Taxslayer 2011 Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Taxslayer 2011 Loans. Taxslayer 2011   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Taxslayer 2011 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. Taxslayer 2011 This means that you must include in income all or part of the amount borrowed. Taxslayer 2011 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. Taxslayer 2011 For details, see Loans Treated as Distributions in Publication 575. Taxslayer 2011 For information on the deductibility of interest, see chapter 23. Taxslayer 2011 Tax-free exchange. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Taxslayer 2011 How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Taxslayer 2011 If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Taxslayer 2011 If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Taxslayer 2011 If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Taxslayer 2011 More than one annuity. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Joint return. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Taxslayer 2011 This includes the amounts your employer contributed that were taxable to you when paid. Taxslayer 2011 Cost does not include any amounts you deducted or were excluded from your income. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Designated Roth accounts. Taxslayer 2011   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Taxslayer 2011 Your cost will also include any in-plan Roth rollovers you included in income. Taxslayer 2011 Foreign employment contributions. Taxslayer 2011   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Taxslayer 2011 See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Taxslayer 2011 Taxation of Periodic Payments Fully taxable payments. Taxslayer 2011   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. Taxslayer 2011 You must report them on your income tax return. Taxslayer 2011 Partly taxable payments. Taxslayer 2011   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. Taxslayer 2011 The rest of the amount you receive is generally taxable. Taxslayer 2011 You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Taxslayer 2011 Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Taxslayer 2011   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Taxslayer 2011 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. Taxslayer 2011   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Taxslayer 2011   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. Taxslayer 2011 Exclusion limit. Taxslayer 2011   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Taxslayer 2011 Once your annuity starting date is determined, it does not change. Taxslayer 2011 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. Taxslayer 2011 That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Taxslayer 2011 Exclusion limited to cost. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 This deduction is not subject to the 2%-of-adjusted-gross-income limit. Taxslayer 2011 Exclusion not limited to cost. Taxslayer 2011   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Taxslayer 2011 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. Taxslayer 2011 The total exclusion may be more than your cost. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 For any other annuity, this number is the number of monthly annuity payments under the contract. Taxslayer 2011 Who must use the Simplified Method. Taxslayer 2011   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. Taxslayer 2011 Guaranteed payments. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 How to use the Simplified Method. Taxslayer 2011    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Taxslayer 2011 Single-life annuity. Taxslayer 2011    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. Taxslayer 2011 Enter on line 3 the number shown for your age at the annuity starting date. Taxslayer 2011 Multiple-lives annuity. Taxslayer 2011   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. Taxslayer 2011 Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Taxslayer 2011   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Taxslayer 2011 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. Taxslayer 2011    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Taxslayer 2011 Example. Taxslayer 2011 Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Taxslayer 2011 Bill's annuity starting date is January 1, 2013. Taxslayer 2011 The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Taxslayer 2011 Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 His completed worksheet is shown in Worksheet 10-A. Taxslayer 2011 Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Taxslayer 2011 Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Taxslayer 2011 The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Taxslayer 2011 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. Taxslayer 2011 This deduction is not subject to the 2%-of-adjusted- gross-income limit. Taxslayer 2011 Worksheet 10-A. Taxslayer 2011 Simplified Method Worksheet for Bill Smith 1. Taxslayer 2011 Enter the total pension or annuity payments received this year. Taxslayer 2011 Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Taxslayer 2011 14,400 2. Taxslayer 2011 Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Taxslayer 2011 See Cost (Investment in the Contract) , earlier 2. Taxslayer 2011 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). Taxslayer 2011 Otherwise, go to line 3. Taxslayer 2011         3. Taxslayer 2011 Enter the appropriate number from Table 1 below. Taxslayer 2011 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. Taxslayer 2011 310     4. Taxslayer 2011 Divide line 2 by the number on line 3 4. Taxslayer 2011 100     5. Taxslayer 2011 Multiply line 4 by the number of months for which this year's payments were made. Taxslayer 2011 If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Taxslayer 2011 Otherwise, go to line 6 5. Taxslayer 2011 1,200     6. Taxslayer 2011 Enter any amounts previously recovered tax free in years after 1986. Taxslayer 2011 This is the amount shown on line 10 of your worksheet for last year 6. Taxslayer 2011 -0-     7. Taxslayer 2011 Subtract line 6 from line 2 7. Taxslayer 2011 31,000     8. Taxslayer 2011 Enter the smaller of line 5 or line 7 8. Taxslayer 2011 1,200 9. Taxslayer 2011 Taxable amount for year. Taxslayer 2011 Subtract line 8 from line 1. Taxslayer 2011 Enter the result, but not less than zero. Taxslayer 2011 Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Taxslayer 2011 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Taxslayer 2011 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. Taxslayer 2011     10. Taxslayer 2011 Was your annuity starting date before 1987? □ Yes. Taxslayer 2011 STOP. Taxslayer 2011 Do not complete the rest of this worksheet. Taxslayer 2011  ☑ No. Taxslayer 2011 Add lines 6 and 8. Taxslayer 2011 This is the amount you have recovered tax free through 2013. Taxslayer 2011 You will need this number if you need to fill out this worksheet next year 10. Taxslayer 2011 1,200 11. Taxslayer 2011 Balance of cost to be recovered. Taxslayer 2011 Subtract line 10 from line 2. Taxslayer 2011 If zero, you will not have to complete this worksheet next year. Taxslayer 2011 The payments you receive next year will generally be fully taxable 11. Taxslayer 2011 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Taxslayer 2011 . Taxslayer 2011 . Taxslayer 2011 before November 19, 1996, enter on line 3. Taxslayer 2011 . Taxslayer 2011 . Taxslayer 2011 after November 18, 1996, enter on line 3. Taxslayer 2011 . Taxslayer 2011 . Taxslayer 2011 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. Taxslayer 2011 . Taxslayer 2011 . Taxslayer 2011   THEN enter on line 3. Taxslayer 2011 . Taxslayer 2011 . Taxslayer 2011 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. Taxslayer 2011 Who must use the General Rule. Taxslayer 2011   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. Taxslayer 2011 Annuity starting before November 19, 1996. Taxslayer 2011   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. Taxslayer 2011 You also had to use it for any fixed-period annuity. Taxslayer 2011 If you did not have to use the General Rule, you could have chosen to use it. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 Who cannot use the General Rule. Taxslayer 2011   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. Taxslayer 2011 See Who must use the Simplified Method , earlier. Taxslayer 2011 More information. Taxslayer 2011   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Taxslayer 2011 Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Taxslayer 2011 They include all payments other than periodic payments and corrective distributions. Taxslayer 2011 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. Taxslayer 2011 Corrective distributions of excess plan contributions. Taxslayer 2011   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Taxslayer 2011 To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Taxslayer 2011 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. Taxslayer 2011 Figuring the taxable amount of nonperiodic payments. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Annuity starting date. Taxslayer 2011   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. Taxslayer 2011 Distribution on or after annuity starting date. Taxslayer 2011   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. Taxslayer 2011 Distribution before annuity starting date. Taxslayer 2011   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. Taxslayer 2011 You exclude from your gross income the part that you allocate to the cost. Taxslayer 2011 You include the remainder in your gross income. Taxslayer 2011   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). Taxslayer 2011 This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Taxslayer 2011    Distributions from nonqualified plans are subject to the net investment income tax. Taxslayer 2011 See the Instructions for Form 8960. Taxslayer 2011   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Taxslayer 2011 Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Taxslayer 2011 If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Taxslayer 2011 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). Taxslayer 2011 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. Taxslayer 2011 The participant's entire balance from a plan does not include certain forfeited amounts. Taxslayer 2011 It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Taxslayer 2011 The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Taxslayer 2011 You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Taxslayer 2011 Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Taxslayer 2011 The tax figured on Form 4972 is added to the regular tax figured on your other income. Taxslayer 2011 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. Taxslayer 2011 How to treat the distribution. Taxslayer 2011   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Taxslayer 2011 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. Taxslayer 2011 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). Taxslayer 2011 Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Taxslayer 2011 Roll over all or part of the distribution. Taxslayer 2011 See Rollovers , later. Taxslayer 2011 No tax is currently due on the part rolled over. Taxslayer 2011 Report any part not rolled over as ordinary income. Taxslayer 2011 Report the entire taxable part of the distribution as ordinary income on your tax return. Taxslayer 2011   The first three options are explained in the following discussions. Taxslayer 2011 Electing optional lump-sum treatment. Taxslayer 2011   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Taxslayer 2011 If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Taxslayer 2011 Taxable and tax-free parts of the distribution. Taxslayer 2011    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Taxslayer 2011 You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Taxslayer 2011 Cost. Taxslayer 2011   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. Taxslayer 2011 You must reduce this cost by amounts previously distributed tax free. Taxslayer 2011 Net unrealized appreciation (NUA). Taxslayer 2011   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. Taxslayer 2011 (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Taxslayer 2011 ) 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. Taxslayer 2011 The amount treated as capital gain is taxed at a 20% rate. Taxslayer 2011 You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Taxslayer 2011 Complete Part II of Form 4972 to choose the 20% capital gain election. Taxslayer 2011 For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Taxslayer 2011 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. Taxslayer 2011 You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Taxslayer 2011 You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Complete Part III of Form 4972 to choose the 10-year tax option. Taxslayer 2011 You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Taxslayer 2011 Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Taxslayer 2011 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. Taxslayer 2011 For this purpose, the following plans are qualified retirement plans. Taxslayer 2011 A qualified employee plan. Taxslayer 2011 A qualified employee annuity. Taxslayer 2011 A tax-sheltered annuity plan (403(b) plan). Taxslayer 2011 An eligible state or local government section 457 deferred compensation plan. Taxslayer 2011 Eligible rollover distributions. Taxslayer 2011   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Taxslayer 2011 For information about exceptions to eligible rollover distributions, see Publication 575. Taxslayer 2011 Rollover of nontaxable amounts. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Taxslayer 2011 To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Taxslayer 2011 For more information, see the Form 8606 instructions. Taxslayer 2011 Direct rollover option. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Payment to you option. Taxslayer 2011   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Taxslayer 2011 However, the full amount is treated as distributed to you even though you actually receive only 80%. Taxslayer 2011 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. Taxslayer 2011 (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Taxslayer 2011 )    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. Taxslayer 2011 Time for making rollover. Taxslayer 2011   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. Taxslayer 2011 (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. Taxslayer 2011 )   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. Taxslayer 2011   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. Taxslayer 2011 Qualified domestic relations order (QDRO). Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Taxslayer 2011 See Rollovers in Publication 575 for more information on benefits received under a QDRO. Taxslayer 2011 Rollover by surviving spouse. Taxslayer 2011   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. Taxslayer 2011 The rollover rules apply to you as if you were the employee. Taxslayer 2011 You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Taxslayer 2011 For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Taxslayer 2011    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Taxslayer 2011 However, see Rollovers by nonspouse beneficiary next. Taxslayer 2011 Rollovers by nonspouse beneficiary. Taxslayer 2011   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. Taxslayer 2011 The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Taxslayer 2011 The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Taxslayer 2011 For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Taxslayer 2011 Retirement bonds. Taxslayer 2011   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. Taxslayer 2011 Designated Roth accounts. Taxslayer 2011   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Taxslayer 2011 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. Taxslayer 2011 For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Taxslayer 2011 In-plan rollovers to designated Roth accounts. Taxslayer 2011   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. Taxslayer 2011 The rollover of any untaxed amounts must be included in income. Taxslayer 2011 See Designated Roth accounts under Rollovers in Publication 575 for more information. Taxslayer 2011 Rollovers to Roth IRAs. Taxslayer 2011   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 In addition, the 10% tax on early distributions does not apply. Taxslayer 2011 More information. Taxslayer 2011   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Taxslayer 2011 These taxes are discussed in the following sections. Taxslayer 2011 If you must pay either of these taxes, report them on Form 5329. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Taxslayer 2011 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. Taxslayer 2011 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%. Taxslayer 2011 This tax applies to the part of the distribution that you must include in gross income. Taxslayer 2011 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). Taxslayer 2011 5% rate on certain early distributions from deferred annuity contracts. Taxslayer 2011   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Taxslayer 2011 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. Taxslayer 2011 On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Taxslayer 2011 Attach an explanation to your return. Taxslayer 2011 Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 The additional tax is figured on Form 5329. Taxslayer 2011 For more information, see Form 5329 and its instructions. Taxslayer 2011 For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Taxslayer 2011 Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 The additional tax is figured on Form 5329. Taxslayer 2011 For more information, see Form 5329 and its instructions. Taxslayer 2011 For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Taxslayer 2011 Exceptions to tax. Taxslayer 2011    Certain early distributions are excepted from the early distribution tax. Taxslayer 2011 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. Taxslayer 2011 If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Taxslayer 2011 Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Taxslayer 2011 On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Taxslayer 2011    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. Taxslayer 2011 Enter exception number “12” on line 2. Taxslayer 2011 General exceptions. Taxslayer 2011   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. Taxslayer 2011 Additional exceptions for qualified retirement plans. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 See Pub. Taxslayer 2011 721 for more information on the phased retirement program. Taxslayer 2011 Qualified public safety employees. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Qualified reservist distributions. Taxslayer 2011   A qualified reservist distribution is not subject to the additional tax on early distributions. Taxslayer 2011 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. Taxslayer 2011 You must have been ordered or called to active duty after September 11, 2001. Taxslayer 2011 For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Taxslayer 2011 Additional exceptions for nonqualified annuity contracts. Taxslayer 2011   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). Taxslayer 2011 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). Taxslayer 2011 The payments each year cannot be less than the required minimum distribution. Taxslayer 2011 Required distributions not made. Taxslayer 2011   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. Taxslayer 2011 The tax equals 50% of the part of the required minimum distribution that was not distributed. Taxslayer 2011   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). Taxslayer 2011 Waiver. Taxslayer 2011   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. Taxslayer 2011 See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Taxslayer 2011 State insurer delinquency proceedings. Taxslayer 2011   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Taxslayer 2011 If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Taxslayer 2011 Under certain conditions, you will not have to pay the 50% excise tax. Taxslayer 2011 Required beginning date. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Taxslayer 2011 Your required distribution then must be made for 2014 by December 31, 2014. Taxslayer 2011 5% owners. Taxslayer 2011   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. Taxslayer 2011   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. Taxslayer 2011 Age 70½. Taxslayer 2011   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Taxslayer 2011   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Taxslayer 2011 If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Taxslayer 2011 Required distributions. Taxslayer 2011   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). Taxslayer 2011 Additional information. Taxslayer 2011   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Taxslayer 2011 Form 5329. Taxslayer 2011   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Taxslayer 2011 Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Taxslayer 2011 However, some special rules apply. Taxslayer 2011 See Publication 575 for more information. Taxslayer 2011 Survivors of employees. Taxslayer 2011   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. Taxslayer 2011 You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Taxslayer 2011 Survivors of retirees. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011    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. Taxslayer 2011 The resulting tax-free amount will then remain fixed. Taxslayer 2011 Any increases in the survivor annuity are fully taxable. Taxslayer 2011    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. Taxslayer 2011 This amount remains fixed even if the annuity payments are increased or decreased. Taxslayer 2011 See Simplified Method , earlier. Taxslayer 2011   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Taxslayer 2011 Estate tax deduction. Taxslayer 2011   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. Taxslayer 2011 You can deduct the part of the total estate tax that was based on the annuity. Taxslayer 2011 The deceased annuitant must have died after the annuity starting date. Taxslayer 2011 (For details, see section 1. Taxslayer 2011 691(d)-1 of the regulations. Taxslayer 2011 ) Deduct it in equal amounts over your remaining life expectancy. Taxslayer 2011   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. Taxslayer 2011   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Taxslayer 2011 This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Taxslayer 2011 See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Taxslayer 2011 Prev  Up  Next   Home   More Online Publications