Publication 554
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Tax on Early DistributionsMost distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59½ are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution. For this purpose, a qualified retirement plan is:
5% rate on certain early distributions from deferred annuity contracts. If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. On line 4 of Form 5329, multiply by 5% instead of 10%. Attach an explanation to your return. Exceptions to tax. The early distribution tax does not apply to any distribution that meets one of the following exceptions. General exceptions. The tax does not apply to distributions that are:
Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:
Additional exceptions for nonqualified annuity contracts. The tax does not apply to distributions that are:
Reporting tax or exception. If distribution code 1 (early distribution, no known exception) is shown in box 7 of Form 1099-R, multiply the taxable part of the early distribution by 10% and enter the result on line 58 of Form 1040. Write No on the dotted line. You do not have to file Form 5329. You do not have to file Form 5329 if you qualify for an exception to the 10% tax and distribution code 2, 3, or 4 is shown in box 7 of Form 1099-R. However, you must file Form 5329 if the code is not shown or the code shown is incorrect (for example, code 1 is shown although you meet an exception). Tax on Excess AccumulationTo make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans generally must begin no later than your required beginning date (unless the rule for 5% owners applies). This is April 1 of the year that follows the later of:
For this purpose, a qualified retirement plan includes:
5% owners. If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions by April 1 of the year after the calendar year in which you reach age 70½. Amount of tax. If you do not receive the required minimum distribution, you are subject to an additional tax. The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall. Form 5329. You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan. Additional information. For more detailed information on the tax on excess accumulation, see Publication 575. Railroad Retirement BenefitsBenefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes. Tier 1. The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated (for tax purposes) like social security benefits. (See Social Security and Equivalent Railroad Retirement Benefits, later.) Non-social security equivalent benefits. The second category consists of the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB), and any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits is treated as an amount received from a qualified employee plan. This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Vested dual benefits and supplemental annuity benefits are fully taxable. More information. For more information about railroad retirement benefits, see Publication 575. --> Military Retirement PayMilitary retirement pay based on age or length of service is taxable and must be included in income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. Veterans' benefits and insurance are discussed in Publication 525. Social Security and
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A. | Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.) | A. | |
Note: If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. | |||
B. | Enter one-half of the amount on line A | B. | |
C. | Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total | C. | |
D. | Write in any tax-exempt interest income (such as interest on municipal bonds) plus exclusions from income (listed earlier) | D. | |
E. | Add lines B, C, and D and write in the total | E. | |
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount some of your benefits may be taxable. You then need to complete the Social Security Benefits Worksheet in the instructions for either Form 1040 or Form 1040A. |
Base Amount Worksheet
A. | Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.) | A. | |
Note: If the amount on line A is zero or less, stop here; none of your benefits are taxable this year. | |||
B. | Enter one-half of the amount on line A | B. | |
C. | Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total | C. | |
D. | Write in any tax-exempt interest income (such as interest on municipal bonds) plus exclusions from income (listed earlier) | D. | |
E. | Add lines B, C, and D and write in the total | E. | |
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount some of your benefits may be taxable. You then need to complete the Social Security Benefits Worksheet in the instructions for either Form 1040 or Form 1040A. |
Any repayment of benefits you made during 2002 must be subtracted from the gross benefits you received in 2002. It does not matter whether the repayment was for a benefit you received in 2002 or in an earlier year. If you repaid more than the gross benefits you received in 2002, see Repayments More Than Gross Benefits, later.
Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2002 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.
You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. You can choose withholding at 7%, 10%, 15%, or 27% of your total benefit payment.
If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. For details, get Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals.
If part of your benefits is taxable, you must use Form 1040 or Form 1040A. You cannot use Form 1040EZ.
Reporting on Form 1040. Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. If you are married filing separately and you lived apart from your spouse for all of 2002, also enter D to the right of the word benefits on line 20a.
Reporting on Form 1040A. Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. If you are married filing separately and you lived apart from your spouse for all of 2002, enter D to the right of the word benefits on line 14a.
Benefits not taxable. If none of your benefits are taxable, do not report any of them on your tax return. However, if you are married filing separately and you lived apart from your spouse for all of 2002, make the following entries. On Form 1040, enter D to the right of the word benefits on line 20a and -0- on line 20b. On Form 1040A, enter D to the right of the word benefits on line 14a and -0- on line 14b.
If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits.
Maximum taxable part. The taxable part of your benefits usually cannot be more than 50%. However, up to 85% of your benefits can be taxable if either of the following situations applies to you.
Which worksheet to use. A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. You can use either that worksheet or Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, unless any of the following situations applies to you.
You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2002 in your 2002 income, even if the payment includes benefits for an earlier year.
This type of
lump-sum benefit payment should not be confused with the lump-sum death benefit that both
the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit
is subject to tax.
Generally, you use your 2002 income to figure the taxable part of the total benefits received in 2002. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits. See Publication 915 for more information.
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