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How to Avoid the Most Common Form 1099-R Mistakes

Dana Anspach, the president of Sensible Money, describes how to avoid the most common Form 1099-R mistakes.

This time of year, your mailbox is likely filling up with forms that you'll need to file your tax return. Some of these forms might describe how much interest income you received from your bank, or how much interest you paid on your mortgage, or the dollar amount of dividends and capital gains you received from your mutual fund.

And if you received a distribution from a retirement account -- a pension, an annuity, a retirement or profit-sharing plan, an , an inherited or an insurance contract -- you're going to receive a Form 1099-R, according to Dana Anspach, CFP, RMA, the president and founder of Sensible Money.

Typically, retirement account owners who receive a Form 1099-R will pay federal and state income tax on the taxable amount, said Anspach, who is author of Control Your Retirement Destiny: Achieving Financial Security Before The Big Transition and the instructor for the Great Course, How to Plan for the Perfect Retirement.

But as with most things having to do with taxes, there are mistakes to be made (and avoided) when it comes to Form 1099-R, said Anspach in a video interview.

What are some of those mistakes?

Is this the first time you ever received a Form 1099-R?

Some taxpayers - especially do-it-yourselfers - forget to report the taxable amount in box 2a on Form 1099-R on their tax return. And this means you're likely underreporting your taxable income and possibly underpaying how much you might owe in taxes, putting yourself at risk of having to pay a penalty, said Anspach.

Don't report the gross distribution amount on your 1040

Some taxpayers mistakenly report the gross distribution rather than the taxable amount on their 1099. "The gross distribution amount that's reported on Form 1099 might not be taxable," said Anspach.

Rollovers aren't taxable

Did you happen to roll funds from one retirement account into another - your 401(k) or 403(b) to an , for instance. If so, you'll get a Form 1099-R.

Now you might be inclined to report the amount of the rollover - the gross distribution -- as taxable income. Don't. “None of it was taxable because it all went to the account,” said Anspach.

Did you take a qualified charitable distribution?

Generally, a qualified charitable distribution (QCD) is an otherwise taxable distribution from an (other than an ongoing SEP or SIMPLE ) owned by an individual who is age 70½ or over that is paid directly from the to a qualified charity, according to the IRS.

Not surprisingly, taxpayers are prone to making costly mistakes when taking a QCD.

“It's not reported as part of your adjusted gross income but on the 1099 your custodian will report the full amount,” said Anspach. “And it is up to you to then keep track of the portion that is not taxable. So that's a mistake I see when people forget, and they still pay taxes on the full amount of the distribution.”

To report a QCD on your Form 1040 tax return, the IRS recommends that you generally report the full amount of the charitable distribution on the line for distributions. Then, on the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter "QCD" next to this line. Note: If you do itemize your deductions, you cannot then claim the amount of the QCD as a deduction, as your charitable distribution has already been excluded from your taxable income.

And since the QCD is excluded from your taxable income it could reduce how much of your Social Security income is taxed as well as reduce how much extra you might pay for Medicare Part B and Part D premiums. (High income Medicare beneficiaries are subject to paying an income related monthly adjustment on their Part B and Part D premiums. Read Social Security Income-Related Monthly Adjustment Amount Notice.)

Distributions from nondeductible IRAs

Did you make non-deductible contributions to an IRA and now you are taking distributions from ? Good news if so. The distribution isn’t all taxable; just the amount in excess of your basis is taxable income, says Anspach. The bad news? Your Form 1099-R isn’t going to tell you what portion of that distribution isn’t taxable and if you report the gross distribution, you’ll likely be paying more tax than the law demands.

How might you know the amount that’s in excess of your basis? Well, with hope you filed Form 8606 with the IRS and stored a copy of that form in an easy-to-locate place. Form 8606 keeps track of your basis in a nondeductible .

The potential for a similar mistake arises when doing a Roth conversion when you own traditional IRAs and nondeductible IRAs. Part of the taxable amount is basis from the nondeductible and not taxable.

To determine how much is taxable you’ll have to become familiar with the aggregation rule. Under that rule, the taxable amount is pro-rated: it’s based the basis of the deductible and any other balances. Read Using Nondeductible IRA Contributions to Get Money into a Roth IRA.

Did you take a coronavirus related distribution?

Under the CARES Act, qualified individuals could take up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) and receive and receive favorable tax treatment.

Now you get to repay part or all the coronavirus-related distribution to an eligible retirement plan, if you complete the repayment within three years after the date that the distribution was received, according to the IRS.

As for paying taxes, you get to include the amount in income ratably over three years, starting with 2020 or include the entire amount in income for 2020. And if you repay a coronavirus-related distribution, the IRS says the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

RMDs waived in 2020

The CARES Act waived required minimum distributions for 2020. But if you took an RMD in 2020 from certain retirement accounts you had the opportunity, up until Aug. 31, to roll those funds back into a retirement account.

And if you took an RMD in 2020 you’re going to get a Form 1099-R. If you didn’t roll the funds back, you’ll likely have to pay taxes on the taxable amount.

But if you did roll the funds back, you won’t owe taxes on the taxable amount. To make sure you don’t get taxed on the RMD that you rolled back into a retirement account, you’d enter the taxable amount 4a of your 1040 ( distributions) and 0 4b (the taxable amount).

“So, it’s up to you to make sure that you report it correctly on your tax return so that you don't pay tax on it because it wasn't supposed to be taxed,” said Anspach.

Of note, Anspach said you will receive in the spring Form 5498: IRA Contributions Information, which reports your contributions to the IRS. In essence, this form “will show that that money was put back,’ she said.

Hire a tax professional

If you're not sure what you're doing, Anspach said it always pays to use a tax professional. But even if you’re using a tax professional you can’t be a passive observer of the process. You’ll have to interpret your Form 1099s for the tax professional.

“You are still going to have to be the responsible party and let them know” that you took a QCD or that you put back your RMD. “You still have to partake in the tax planning and, and all of those decisions, even if you are using a professional.”


Upcoming live webinar

How to Make a Retirement Income Plan

Thursday <> Jan. 21, 2021 <> 7 p.m. - 8:30 p.m. EST

How much will you need to retire, and where will it come from? In this live webinar, Dana Anspach of Sensible Money will show you how to make a detailed retirement income plan by creating a series of timelines that chart out your future income and expense. You will learn how to create a crystal-clear picture of your future retirement income.

Topics to be covered:

• How to make a retirement budget and the most overlooked expenses

• What a future income timeline looks like

• How to calculate how much you will need to withdraw each year during retirement

• Mistakes people make with their assumptions about inflation and rates of return

• How to see if your retirement money will last

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