Form 1099-R statements report distributions from various retirement plans.
When a taxpayer receives a distribution from a pension plan or takes a withdrawal from an Individual Retirement Account (IRA) before reaching age 59-1/2, the taxpayer may be subject to a 10% additional penalty on the amount of the withdrawal. This 10% early withdrawal penalty (or tax) is in addition to having the full amount of the distribution considered taxable income.
The Distribution Code in Box 7 of Form 1099-R identifies the type of distribution received by the taxpayer. Certain distributions may be subject to the additional 10% tax, reported on Form 5329.
Distribution Code 1 indicates an early distribution from the retirement plan and in most cases is subject to the 10% early withdrawal penalty.
There are a few exceptions to the penalty, however. A few of the more common reasons that an early distribution may qualify for a penalty exclusion are listed below:
- Due to Total and Permanent Disability
- To the Extent that the Taxpayer has Medical Expenses
- Distribution Taken for Higher Education Expenses (Applies only to IRA Distributions)
- Distributions Taken for First Home Purchase, up to $10,000 (Applies only to IRAs)
- Reservists Serving on Active Duty for at least 180 Days
If a taxpayer takes an early withdrawal from a retirement account to simply pay off personal debt, the withdrawal will be subject to the 10% penalty.
There is also an exception for retired public safety officers. An eligible Public Safety Officer includes:
- a law enforcement officer
- firefighter
- chaplain
- or member of a rescue squad or ambulance crew
A retired public safety officer may exclude up to $3,000 from taxable income distributions made from an eligible retirement plan used to pay the premiums for accident insurance, health insurance, or long-term care insurance. The premiums can be for coverage for the taxpayer, spouse, or dependents. The distributions must be made directly from the plan to the insurance provider.
Distribution Code 3 on the 1099-R indicates a Disability distribution. In order to be considered disabled, the taxpayer has to furnish proof that he or she cannot do any substantial gainful activity because of some physical or mental condition. This physical or mental condition must be determined by a physician to be something that the taxpayer will have for the rest of his or her life or for a long, continued and indefinite period. It cannot be a condition that the taxpayer can reasonably be expected to recover from, or a condition that is a physical handicap but does not prevent the individual from engaging in gainful activity.
A distribution from an IRA or a pension plan to a taxpayer that has been made due to his or her disability is fully taxable unless the taxpayer had made non-deductible contributions to the IRA or other non-deductible contributions to a pension plan. However, such a distribution is not subject to the 10% early withdrawal penalty, regardless of the age of the taxpayer.
To enter Form 1099-R, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- IRA, Pension Distributions (1099R, RRB-1099-R)
- New - if prompted, indicate whether the payee is the taxpayer or spouse.
- Enter the payer EIN, name and address.
- Enter the Gross Distribution in Form 1099-R Box 1.
- The taxable amount in Box 2a should normally be the same as the amount from Box 1.
- When entering the Distribution Code in Box 7, if the Code is a 3, the 10% Additional Tax for Early Withdrawal does not apply and no further action is necessary upon exiting this 1099-R menu. However, when the Distribution Code in Box 7, is a 1 or 2, the program will prompt you to select which part of Form 5329 the distribution should transfer to. Because the distribution is from a pension plan or IRA, select "Transfer 1099-R Box 2a to Form 5329, Part I, Line 1".
- "Does the Amount being Carried to Form 5329 Qualify for Any Penalty Exclusion?" - If the taxpayer is claiming an exclusion from the 10% Additional Tax for Early Withdrawal due to Disability, this question should be answered YES. Select exclusion #3 - Due to Total and Permanent Disability, and the user will enter the amount of the gross distribution that was reported in Box 2a that qualifies for an exclusion due to disability.
- No further action is necessary upon exiting this 1099-R menu and the software will transfer the amount to be excluded from the 10% Additional Tax for Early Withdrawal to Form 5329. The program will also transfer the taxable amount of the gross distribution to Line 4b of the Form 1040.
NOTE: This is a guide on entering a distribution reported on Form 1099-R into the program when the taxpayer is claiming a Disability exemption. This is not intended as tax advice.
Additional Resources:
Publication 575 - Pension and Annuity Income
Publication 590-B -Distributions from Individual Retirement Plans
