# Presentation: 805450

## Lesson 11

**Pensions and Other Retirement Income**

**Notes:**
This lesson contains information for all courses (except the Basic Course) and has been updated for Tax Year 2007. 

  References: 
Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit
Form SSA-1099, Social Security Benefit Statement
Form RRB-1099, Payments by the Railroad Retirement Board 
Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board
Simplified Method Worksheet
Social Security Benefits Worksheet
Publication 554, Older Americans’ Tax Guide
Publication 575, Pensions and Annuities
Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits
Publication 915, Social Security and Equivalent Railroad Retirement Benefits
Publication 939, General Rule for Pensions and Annuities

Progress to the next slide.

##  Objectives

- Determine the taxable portion of different types of retirement income
- Determine how to report different types of retirement income on the tax return
- Explain when a minimum distribution is required
- Determine when an adjustment to withholding should be made

**Notes:**
Review the lesson objectives with the class.
Remind students how important it is to avoid overly complicated returns. This lesson will not cover all of the possible retirement income scenarios. If a volunteer does not feel qualified to deal with a particular retirement income situation, the volunteer should suggest that the taxpayer see a paid tax preparer.
Optional class activity—Effective interviewing is essential to the completion of an accurate return. If you have the time, ask students to suggest questions that they might need to ask about retirement income. Record their answers on a flipchart. 

Progress to the next slide.

## Intake/Interview Process

- Form 13614 – Intake and Interview Sheet  Income Section

**Notes:**
Use Form 13614, Intake and Interview Sheet, to engage the taxpayer in preparing an accurate return. 
Use the Intake and Interview Sheet as a starting point for a comprehensive interaction with the taxpayer, in combination with all the source documents provided by the taxpayer, to ensure quality and accuracy on each return.  
Confirm each item on Form 13614 (or similar tool used at your site) to make sure you and the taxpayer have considered all the necessary information. Ensure that all questions and issues have been addressed. If items are incorrect or incomplete, revisit each issue and make corrections to the return, as needed. 
Pensions and IRA distributions are covered in this lesson. To accurately report this type of income, ask the taxpayer about income or distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc. This income may be fully or partially taxable. Form 1099-R is the most common form used to report this income. Confirm that all income received by the taxpayer has been discussed and shown on the return, if required. 
You will learn more about pensions and IRA distributions later in this lesson.
Social Security and Railroad Retirement income are also covered in this lesson. To accurately report this type of income, ask the taxpayer about the receipt of either of these benefits. The Social Security Administration issues Form SSA-1099 to social security benefit recipients. The Railroad Retirement Board uses Form RRB-1099 or Form RRB-1099-R to report benefit payments. Confirm that all income received by the taxpayer has been discussed and shown on the return, if required. 
You will learn more about Social Security and Railroad Retirement benefits later in this lesson.

Progress to the next slide.

## Pensions and Annuities

- Pension
- Annuity
- Qualified Employee Plan
- 401(k) Plan

**Notes:**
Define the various types of pensions and annuities.
Inform students that the most common form used to report pension and annuity income is Form 1099-R. Have students review a Form 1099-R.

Progress to the next slide.

## Taxable Portion of Retirement Income

- Fully Taxable
- No basis (employee contribution) in the plan
- All distributions are included in taxable income
- Partially Taxable
- Basis or cost in the plan
- Only the taxable portion of the distribution is included in taxable income

**Notes:**
Remind students that pensions are either fully or partially taxable. The taxability of a pension depends on whether an employee made “after-tax” contributions to the plan. If a taxpayer contributed to a pension plan, part of the benefit received is a return of income that was taxed in earlier years, thus it is not taxable. If a taxpayer did not contribute to the pension plan, the benefits received are fully taxable. Military pensions are noncontributory and are usually fully taxable. 
	Note: There is an exception for contributions to a Thrift Savings Plan while in a combat zone.
Review Example 1.
Complete Exercise 1 with the class.
If presenting the Advanced Course, progress to the next slide. Otherwise, skip the next slide and progress to the slide titled “Reporting the Income.”

Progress to the next slide.

## Determining Taxable Retirement Income

- The General Rule
- The Simplified Method
- Based on total basis or cost in the plan and total anticipated monthly payments
- Use Simplified Method Worksheet
- Tax-free portion of each payment does not change, once computed

**Notes:**
Explain that the payer may or may not compute the taxable portion of the benefits. 
Explain that there are two methods of determining the taxable portion of a pension or annuity. The annuity starting date determines which method to use. The General Rule is used for nonqualified plans and the Simplified Method is used for annuity starting dates after November 18, 1996.
Remind students that the Simplified Method Worksheet does not have to be completed unless the tax-free portion of the retirement benefit is not known.
Review a Simplified Method Worksheet.
Review Example 2.
Have students complete Exercise 2 and then discuss.

Progress to the next slide.	

## Reporting the Income

| Income Type | 1040 Line # | 1040A Line # |
| --- | --- | --- |
| IRA  | 15 | 11 |
| Pension  | 16 | 12 |
| Annuity  | 16 | 12 |
| Social Security  | 20 | 14 |
| Railroad Tier 1  | 20 | 14 |
| Railroad Tier 2  | 16 | 12 |

**Notes:**
Review Form 1040 and Form 1040A while pointing out line items for reporting each type of retirement income.
A fully taxable pension is reported on Form 1040, line 16b, or Form 1040A, line 12b.
If teaching the Advanced Course, advance to the next slide. Otherwise, skip the next 3 slides and progress to the slide titled “Social Security Benefits and Railroad Retirement SSEB.”

Progress to the next slide.

## Disability Pension	

- Treat as **wages** until the taxpayer reaches minimum retirement age (report on Form 1040, line 7)
- Treat as **pension** income once minimum retirement age is reached (report on Form 1040, line 16)

**Notes:**
Explain that if a taxpayer retires on disability, taxable disability payments are reported as wages until the minimum retirement age is reached.
Review Example 3 with the students.
Show students the proper line numbers on Form 1040 and Form 1040A to report disability pension payments.

Progress to the next slide.

##  Minimum Distributions

- Distributions must begin by the **required beginning date**
- Must receive entire interest in the plan **or** **the** **minimum required distribution**
- Excise tax (50%) imposed on amount not distributed as required

**Notes:**
Explain the required beginning date for minimum distributions.
Ask the students to define minimum required distribution.
Remind students that Form 5329 has to be filed if the taxpayer did not receive a required minimum distribution.
Optional Guided Question:  
By what date, and at what age, is a taxpayer required to receive minimum distributions? (For traditional IRAs, taxpayers must receive minimum distributions by April 1 of the year following the calendar year in which they turn 701⁄2 years old. Generally, for all other retirement plans discussed in this lesson, a taxpayer who is still working at age 701⁄2 can postpone receiving distributions until April 1 of the year after the year he or she retires.)

Progress to the next slide.

## Railroad Retirement

- Benefits paid under two categories:
- Social Security Equivalent Benefits (SSEB)
- Reported on** Form RRB-1099**
- Treat as* ***social security*** *benefits
- Non-Social Security Equivalent Benefits (NSSEB)
- Reported on** Form RRB-1099-R**
- Treat as* ***pension*** *benefits

**Notes:**
Explain that railroad retirement benefits are paid out under two categories and on two forms: RRB-1099 and RRB-1099-R.
Have students reference their copies of each type of form for review. Explain how each type of form is reported on a tax return (reported as social security or pension).
Review Example 5 from the text.

Progress to the next slide.

## Social Security Benefits and Railroad Retirement SSEB

- A portion of Social Security Benefits or Railroad Retirement SSEB **may** be taxable
- Generally up to 50%
- Can be up to 85%, if:
- Income +1⁄2 of benefits exceeds base amount **or**
- Married filing separately and lived with spouse
- Use the Social Security Benefits Worksheet to calculate the taxable benefits

**Notes:**
Remind students that railroad retirement SSEB are reported on Form RRB-1099 and that regular social security benefits are reported on Form SSA-1099. Have students refer to a copy of Form SSA-1099.
Explain that, based on how much other income the taxpayer has, a portion of social security and railroad SSEB may be taxable.
Clarify that social security benefits do not include supplemental security income (SSI), which is not taxable.
Tell students to always input the social security benefits into the software, if a computer is used, or to complete the worksheet, if preparing a manual return. This will help determine if any benefits are taxable. Warn students against assuming that all social security benefits are nontaxable.
Refer to the Social Security Benefits Worksheet. Remind students to input the Medicare payments and Volunteer Federal Income Tax Withholding shown on Form SSA-1099.
Review Example 6.

Progress to the next slide.

## Lump-Sum Social Security Benefit Payments

- Payment can be for current and prior years
- Do not confuse with nontaxable lump-sum **death** benefits
- Two options to figure taxable portion:
- Report all in year received – complete Social Security Benefits Worksheet
- Treat as received in earlier year(s) – refer to paid preparer

**Notes:**
Define lump-sum distribution.
Tell students that the taxpayer will receive a Form SSA-1099 or Form RRB-1099, with an amount included in box 3. The form will also show the year(s) that payment was for. Warn students not to confuse lump-sum social security benefits with death benefits, which are nontaxable.
Explain that there are two methods to figure the taxable portion of a lump-sum distribution. Volunteers should only complete returns when the taxpayer chooses the first option. For more information see Publication 915. 
If teaching the Advanced Course, advance to the next slide. Otherwise, skip the next 3 slides and progress to the slide titled “Pension Withholding and Estimated Tax Payments.” 

Progress to the next slide.

## IRA Distributions

**Traditional** IRA distributions may be
-  fully taxable, or
-  partially taxable.
**Roth** IRA distributions are not taxed (if all requirements are met).

**Notes:**
Define traditional IRA.
Define Roth IRA.  
Ask students for examples of IRA issues they have faced in the past.

Progress to the next slide.

## Traditional IRA Distributions

- Taxable as ordinary income in year received
- Reported to taxpayer on Form 1099-R
- Fully taxable – only **deductible** contributions
- Partially taxable – **nondeductible** contributions
- Required minimum distribution by April 1 of year following year taxpayer reaches age 701⁄2

**Notes:**
Explain the difference between a fully and partially taxable traditional IRA.
Warn students that they should not prepare a return with partially taxable IRAs.  These taxpayers should be referred to a paid tax preparer.
Review Example 4.
Explain that, as with pensions, IRAs have similar required minimum distribution rules. Failure to comply with the minimum distributions rules will result in an excise tax of 50% being imposed on the amount not distributed.

Progress to the next slide.

## Roth IRA Distributions

- Qualified distributions are **not** taxable.
- Distributions are qualified if made after 5-taxable-year period after Roth was established, **and**
- Taxpayer is age 591⁄2, or
- Taxpayer is disabled, or
- Distribution was made to a beneficiary/estate after taxpayer’s death, or
- Distribution was used to buy, build, or rebuild a first home.

**Notes:**
Review Roth IRA.
Explain that qualified distributions are not taxable.
Go over the rules that make a distribution qualify as nontaxable.
Inform students that the minimum distribution rules do not apply to Roth IRAs.

Progress to the next slide.

## Pension Withholding and Estimated Tax Payments

- Use **Form** **W-4P** to adjust or change withholding on a pension or annuity.
- Estimated tax payments may be required if:
- Taxpayer has too little tax withheld, or
- Taxpayer owes more than $1,000 in taxes.

**Notes:**
Explain to students that if the taxpayer has too little tax withheld, penalties and interest may be assessed.
Point out the benefits of the HERO Act
Have students complete the Summary Exercise.
Review the Summary Exercise.

Progress to the next slide.

## Quality Review (QR)

- Form 8158 – Quality Review Checklist Income Section

**Notes:**
Use Form 8158, Quality Review Checklist, or Publication 730, Important Tax Records Envelope, or your site’s equivalent form, to review all returns prepared.  
Apply the Quality Review tools, in combination with the Intake and Interview Sheet and all the source documents, to the returns you prepare to ensure quality and accuracy for every taxpayer.  
Consider each box on the Quality Review Checklist that applies to the taxpayer’s situation to confirm that all the necessary questions and issues have been addressed. If items are incorrect or incomplete, revisit each issue and make corrections to the return, as needed.
To accurately report the taxpayer’s income, verify that the taxpayer’s wages are accurate and that all income from Form(s) W-2 and other income documents, such as Form(s) 1099, has been included. 
Confirm that all income received by the taxpayer has been discussed and shown on the return, if required. 

Progress to the next slide.

## Lesson Summary

- Pension benefits are fully or partially taxable.
- Use Simplified Method Worksheet to determine taxable portion of pension.
- Social security benefits may be partially taxable.
- Use Social Security Benefits Worksheet to determine taxable portion.

**Notes:**
Review the PowerPoint slide with the students.
Remind students that disability pensions are treated as wages until the taxpayer reaches minimum retirement age.
Ask if there are any questions.
Optional Guided Questions (Advanced Course):
Reporting Retirement Income: How would you compute taxable pension income for a taxpayer who has more than one pension or annuity? (The taxable part of each pension or annuity should be computed separately, and only the totals should be entered on the proper lines of Form 1040 or Form 1040A.)
Lump-Sum Distributions: How can you determine whether a taxpayer has been paid a lump-sum distribution of his or her pension? (Lump-sum distributions are reported on Form 1099-R. A check in box 2b, Total distribution, indicates that it is a lump-sum distribution.)
Minimum Distributions: By what date, and at what age, is a taxpayer required to receive minimum distributions? (For traditional IRAs, taxpayers must receive minimum distributions by April 1 of the year following the calendar year in which  they turn 701⁄2 years old. Generally, for all other retirement plans discussed in this lesson, a taxpayer who is still working at age 701⁄2 can postpone receiving distributions until April 1 of the year after he or she retires.)
IRAs: What is an IRA? (An IRA is an Individual Retirement Arrangement—any of several kinds of tax-sheltered retirement plans set up by the taxpayer.)

Progress to the next slide.

## Lesson Summary–cont’d

- Traditional IRA distributions may be fully taxable or partially taxable.
- Partially taxable IRA distributions are outside the scope of VITA/TCE.
- Qualifying Roth IRA distributions are not taxable.
- Adjust pension withholding with Form W-4P.

**Notes:**
Optional Guided Questions (Intermediate Course):
What may occur if a taxpayer does not pay enough tax, either through withholding or through estimated tax payments? (The IRS may charge the taxpayer interest and a penalty.)
Are social security benefits always nontaxable? No. Some taxpayers have to include part of their social security benefits in taxable income.)
What is the maximum amount of social security benefits that is subject to tax? (The taxable portion of social security benefits is never more than 85% of the net benefits.)
If some of a taxpayer’s social security benefits are taxable, can he or she have tax withheld on the taxable portion? (Yes. Taxpayers may elect to have taxes withheld on their social security benefits. To make this choice, taxpayers will have to fill out Form W-4V, Voluntary Withholding Request, or equivalent, and give it to the payer.)
Which amounts from the Social Security Benefits Worksheet are transferred to Form 1040 or Form 1040A? (The amounts on lines 1 and 18.)

Progress to Lesson 14 to complete the Intermediate Course; otherwise progress to the next lesson.