Income Details – Pensions & Capital Gains

1. Income Details – Pensions & Capital Gains Oregon Tri-Counties Training 2013

2. Details of Retirement Income • Early Withdrawal Penalty • Simplified Method for calculating taxable portion • Public safety officer special medical insurance deduction Oregon Tri-Counties Training 2013

3. 1099-RWhat is this form telling you? Oregon Tri-Counties Training 2013

4. IRA Box 7 In-Scope Distribution Codes 7 Normal distribution (most common) 1 Early Withdrawal, no known exception 10% additional tax 2 Early distribution, exception applies 3 Disability 4 Death B Designated Roth account distribution G Rollover not taxable, no additional tax applies Q Qualified distribution from Roth IRA Oregon Tri-Counties Training 2013

5. IRA Box 7 In-Scope Distribution Codes • Possible double letter codes • Look up each letter • Example • G4 – rollover distribution to beneficiary upon death of account holder Oregon Tri-Counties Training 2013

6. Traditional IRA Distributions • Potential 10% additional tax for distribution prior to 59½ (“too early” penalty) • Exceptions may apply Oregon Tri-Counties Training 2013

7. TaxWise Form 1099-R Oregon Tri-Counties Training 2013

8. TaxWise Form 1099-R Impact State tax treatment – read state instructions Oregon Tri-Counties Training 2013

9. Early Distribution – Code 1 • IRA distribution prior to age 59½ subject to 10% additional tax • Some early distributions may be exempt from additional tax – add Form 5329 Oregon Tri-Counties Training 2013

10. Common Form 5329 Exception Codes Avoid additional tax if distribution was: 03 due to total and permanent disability 04 due to death 05 for medical expenses >10% of AGI 07 made for unemployed individual health insurance premiums 08 made for higher education expenses Oregon Tri-Counties Training 2013

11. Pub 5329 Additional Taxes on Qualified Plans • See Pub 4012, page H-2 for exception codes Oregon Tri-Counties Training 2013

12. Interview • With 1099-R in hand – IRA box not checked: • Did taxpayer make non-deductible contributions? • Is taxpayer a retired public safety officer? Oregon Tri-Counties Training 2013

13. Employee Contributions • Retirement plan may be funded entirely by employer • Retirement plan may be partially funded by employee before-tax or after-tax contributions • Before-tax – entire distribution will be fully taxable • After-tax – distributions partially taxable (box 9b Form 1099-R) • “Taxable amount not determined” checked Oregon Tri-Counties Training 2013

14. Taxable Distributions • Two methods used to figure taxable portion • General Rule – Out of Scope • Simplified Method • Pub 4012 (Page D-20), 1099-R Exclusion Worksheet Oregon Tri-Counties Training 2013

15. Simplified Method • To calculate you will need: • Cost in plan (box 9b Form 1099-R) • Age – taxpayer’s age on date annuity began • and spouse’s age if joint/survivor annuity is selected • note if annuity starting date is before or after taxpayer’s (and spouse’s) birthday for that year Oregon Tri-Counties Training 2013

16. Simplified Method • To calculate you will also need: • Total of tax-free amounts from previous years – available from the taxpayer’s prior year worksheet • Check previous year amounts (whether taken or not) to assure total cost recovery has not occurred. It’s use it or lose it. Oregon Tri-Counties Training 2013

17. Simplified Method – Single Annuitant Oregon Tri-Counties Training 2013

18. Simplified Method – Joint Annuitant Oregon Tri-Counties Training 2013

19. Simplified Method • After completing Simplified Method worksheet, DO NOT enter taxable amount in box 2 on 1099-R • Correct taxable amount will carry forward to 1040, Line 16b Oregon Tri-Counties Training 2013

20. Pension Distribution – Special Case • Taxpayer dies while still employed • Spouse survives – draws survivor benefits from pension of deceased Taxpayer • Must use only date of birth of spouse and date when survivor started receiving benefit for simplified method Oregon Tri-Counties Training 2013

21. Special Case 2 • Box 1 has a gross distribution amount and Box 2a has “0” • Box 2b not checked • Taxable amount wasdetermined! Oregon Tri-Counties Training 2013

22. Special Case 2 • TaxWise defaults the whole distribution as taxable • Putting “0” in box 2 doesn’t work Oregon Tri-Counties Training 2013

23. Special Case 2 • Need to use line 5 of Exclusion Worksheet to zero out taxable amount Oregon Tri-Counties Training 2013

24. Public Safety Officer Exclusion Oregon Tri-Counties Training 2013

25. Details of Capital Gains • What is a Capital Gain? • Short term vs long term • What is “basis”? • How do I enter the information in Taxwise Oregon Tri-Counties Training 2013

26. Introduction – Sale Of Assets • Key elements of a sale: • When did you buy it • When did you sell it • What is the cost basis • What is the sales price Oregon Tri-Counties Training 2013

27. Interview – What Kind of Sales? • Brokerage or mutual fund statement or Form 1099-B • Stocks or mutual funds • Normally what we see • Sale of personal residence (discussed in more detail later) • All other sales are out of scope Oregon Tri-Counties Training 2013

28. What is the Basis* of Securities • Cost – amount originally paid • Adjusted basis • Add purchase expenses (commissions) • Add sale expenses, if not already used to reduce proceeds • Reduce by non-dividend distributions • Broker will track for “covered” securities! * Basis is term generically used for cost or adjusted basis Oregon Tri-Counties Training 2013

29. What is the Sales Price? • Gross proceeds (sales price) • Not reduced for expenses of sale • Net proceeds • Already reduced for expenses of sale • 1099-B specifies method used Oregon Tri-Counties Training 2013

30. Gross or Net Proceeds • If gross proceeds are reported on 1099-B • Do not adjust proceeds for expenses of sale • Instead, add selling expenses (commissions) to cost of security sold • IRS matches proceeds reported on all Forms 1099-Bs to total proceeds on tax return • Don’t adjust for covered securities – broker has already reflected in cost basis Oregon Tri-Counties Training 2013

31. Entering in TaxWise • Taxpayer receives Forms 1099-B or substitute • There may be “corrected” forms – use last one received (will have date) • Follow the statement • Unless taxpayer has information that statement is incorrect or incomplete Oregon Tri-Counties Training 2013

32. Actual form Oregon Tri-Counties Training 2013

33. Sample Brokerage 1099-B • Format varies by brokerage • Brokers may present transactions subtotaled based on “1099” code Oregon Tri-Counties Training 2013

34. TaxWise Data Flow Enter transaction details on Cap Gn Wkt Flows to Forms 8949 Flows to Sch D Flows to Form 1040 Line 13 • TaxWise does the flowing Oregon Tri-Counties Training 2013

35. Capital Gain & Loss Worksheet • Enter all transactions as on 1099-B Oregon Tri-Counties Training 2013

36. Capital Gain & Loss Worksheet • 1099 Column codes • A or D – basis reported to IRS • B or E – basis not reported to IRS • C or F – not reported on 1099-B • Such as main home • TaxWise will add Forms 8949 as needed Oregon Tri-Counties Training 2013

37. Capital Gain & Loss Worksheet Pub 4012 Page D-14 for codes • Adjustment columns (f) and (g) • For 1099 codes A or D (basis reported to IRS) use for adjustments to basis reported on 1099-B, such as • B – Basis on 1099-B is wrong • W – Wash sale loss disallowed • For all 1099 codes, if “batching” entries • Code M – to indicate a group of transactions (not really an adjustment) Oregon Tri-Counties Training 2013

38. Capital Loss Carryovers • Up to $3,000 Capital Loss can be subtracted from income • TaxWise carries forward available capital loss carryovers from previous years for returning taxpayers • Otherwise, review 2012 tax return for schedule computing capital loss carryover available to 2013 • If no loss carryover schedule, will need to calculate from return Oregon Tri-Counties Training 2013

39. Cap Gn Wkt – Input Short Cut Oregon Tri-Counties Training 2013

40. Input Short Cut – Form 8453 • Need to send details of transactions to IRS • Go to Sch D Pg 1, top of form • Check box if using Form 8453, or • Check box to attach PDF instead* *no need to keep copies (more in later lesson) Oregon Tri-Counties Training 2013

41. Form 8949 Form automatically populated by TaxWise from Cap Gn Wkt and transferred to Schedule D Oregon Tri-Counties Training 2013

42. Tax Forms • May have up to six forms 8949 • One for each 1099 code (A – F) • Only one Schedule D • One or more Schedule D worksheets will usually be generated for calculations • All this is taken care of by Taxwise Oregon Tri-Counties Training 2013

43. Sale of Main Home • Exclusion of gain • Up to $250,000 ($500,000 MFJ) • Must meet both tests: • Ownership • Use Oregon Tri-Counties Training 2013

44. Sale of Main Home • Figuring gain or loss • Amount realized (on sale) • Determining (cost) basis • Maximum exclusion • Taxpayer needs to provide sale and basis information Oregon Tri-Counties Training 2013

45. Sale of Main Home Input • Excludible capital gain: • Nondeductible loss (1099-S received) • Treasury is a profits-only partner Oregon Tri-Counties Training 2013

46. Income Details Questions… Comments… Oregon Tri-Counties Training 2013