If a taxpayer receives Form 1099-R with Box 2b checked - 'Taxable Amount Not Determined', it's the taxpayer's responsibility to determine the amount to be taxed. If the annuity starting date was after July 1, 1986, the taxpayer may be required to use the Simplified Method Worksheet available on the 1099-R Input Screen within the TaxSlayer Pro software.
If a retirement contribution is made with money on which an individual has already paid income tax, it's referred to as an "after-tax" contribution. If a taxpayer's contributions to a pension or annuity retirement plan were made with "after-tax" dollars, and included previously in gross income, the taxpayer can then exclude part of the retirement distributions.
When the payments from the pension first begin upon retirement, the tax-free portion must be calculated. The tax-free portion generally remains the same each year, even if the amount of the total payment changes. The total amount of the pension or annuity that can be excluded from income is limited to the "total cost" of the pension. The "total cost" may be referred to as the "basis" or "investment in the contract".
In general, the taxpayer's "cost" is the net investment in the contract as of the annuity starting date, or the date of distribution, whichever is earlier. To find the "cost", the taxpayer must have a record of the total premiums, contributions, and other amounts paid to the plan. This also includes the amounts paid by the employer that were taxable when paid. The plan "cost" does not include amounts withheld from pay on a tax-deferred basis - or money that was taken out of gross pay before taxes were deducted.
In the Desktop Version of TaxSlayer Pro, the Simplified General Rule Worksheet is accessed using the following steps:
From the Client's 1040 Screen, select Option 2. Income Menu --> Option 10. IRA/Pension Distributions (1099R, RRB-1099-R) --> NEW Button --> In Box 2a. Taxable Amount, check the box for "SGR" --> Answer YES to "Would you like to use the Simplified General Rule Worksheet?"
The taxpayer will need to have the following information on hand:
- The Starting Date of the Annuity
- The Plan Cost (Basis) at the Annuity Starting Date
- The Death Benefit Exclusion (if any)
- The Age of the Annuity Recipient at the Starting Date
- The Number of Months the Annuity was Paid in the tax year
- Any Amounts Previously Recovered from the Basis
- The Cost (Basis) Remaining at the Beginning of the Tax Year
Refer to the IRS Publications below for further guidance:
Information Prior to Tax Year 2018
If Form 1099-R does not show the taxable amount in Box 2a, you may need to use the General Rule explained in Publication 575 and Publication 939 to figure the taxable portion to enter on the tax return. If the annuity starting date was after July 1, 1986, the taxpayer may be required to figure the taxable part of their distribution using the Simplified Method.
NOTE: If Form 1099-R does show a taxable amount, the taxpayer may be able to report a lower taxable amount by using the Simplified Method.
What Is My Annuity Starting Date? What was the first day of the first period for which you received a payment? What was the date that your plan's obligations became fixed? The later of these two dates is your annuity starting date.
Should I Use the Simplified Method? You must use the Simplified Method if your annuity starting date was after July 1, 1986, and this method was used last year to figure the taxable portion. Also, you must use the Simplified Method if your annuity starting date was after November 18, 1996, and BOTH of the following apply:
- You receive your pension or annuity payments from any of the following plans:
- A qualified employee plan.
- A qualified employee annuity.
- A tax-sheltered annuity plan (403(b) plan).
- On your annuity starting date, at least one of the following is true:
- You are under age 75.
- You are entitled to less than 5 years of guaranteed payments.
Can I Use the Simplified Method?
To access the amount for a Public Safety Officer, from the Federal Section select:
- Income Menu
- IRA/Pension Distributions (1099-R, RRB-1099-R, 8930)
- Select Begin next to Add or Edit a 1099-R
- Fill out the Payer's Information
- Enter the Gross Distribution in Box 1 as it is shown on the 1099-R
- For Box 2a, Taxable Amount – the question Do you need to calculate your taxable amount
- Click on the "Click here for options"
You must use the Simplified Method if your annuity starting date was after July 1, 1986, and you used this method last year to figure the taxable part.
Also, you must use the Simplified Method if your annuity starting date was after November 18, 1996, and BOTH 1 and 2 below apply:
(1) The payments are from one of the following: a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan (403(b) plan).
(2) On your annuity starting date, at least one of the following is true:
- You were under age 75
- You are entitled to less than 5 years of guaranteed payments
You CANNOT use the Simplified Method if you receive your pension or annuity from a nonqualified plan or if you do not meet the conditions described above.
If you do not qualify to use the Simplified Method, you should use the General Rule to figure your taxable amount.
- Select Continue
- Enter all the required information
- Continue when finished
NOTE: This is a guide on entering the Simplified General Rule Worksheet into the TaxSlayer ProWeb program. This is not intended as tax advice.