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| Tax School Homepage |
| Pensions – the General Rule and the Simplified Method |
| If you began receiving annuity payments from a qualified retirement plan after July 1, 1986 and before November 19, 1996, you generally could have chosen to use either the Simplified Method or the General Rule to figure the tax-free part of the payments. If you receive annuity payments from a nonqualified retirement plan you must use the general rule. You must also figure the taxable and tax-free parts of your annuity payments using life expectancy tables prescribed by the IRS. However, if you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax-free part of the payments. |
| Lump-Sum Distributions |
| If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options, such as reporting the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income. Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). You also roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income. |
| If the lump-sum distribution includes employer securities and an amount is reported in box 6 of your Form 1099-R for net unrealized appreciation (NUA), the NUA is generally subject to tax when you sell the securities and you must include the income in the year of distribution. |
| Rollovers from Retirement Plans |
| You may defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an IRA. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. However, a rollover eliminates the possibility of using the special tax rules for any later distribution. |
| Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days. |
| A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan. |
| A rollover transaction is not taxable but it is reportable on your federal tax return. You can roll over most distributions from an eligible retirement plan except for the the nontaxable part of a distribution or a distribution that is one of a series of payments made for your life (or life expectancy). You cannot rollover a required minimum distribution or a hardship distribution. Neither could you rollover dividends paid on employer securities or the cost of life insurance coverage. |
| You have 60 days to make a rollover from an eligible retirement plan to another eligible retirement plan. In addition, the taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution. As a consequence, any taxable eligible rollover distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory income tax withholding of 20%. In general, if you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies. |
| Capital Gains and Losses |
| Almost everything you own and use for personal or investment purposes is a capital asset. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. If you sell capital assets you may have capital gains which may be taxed at rates greater than 15% such as when the taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate. Also net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate. Another situation when you get taxed at greater than 15% is when the portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate. |
| If you hold the asset for more than one year before you dispose of it, your capital gain or loss is a long term capital gain. You report you capital gains and deductible capital losses on Schedule D and you may also need to use Form 8949. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed in one year is no more than $3,000. |
| Copyright © 2014 [Hera's Income Tax School]. All Annual Filing Season Program rights reserved. |
| Revised: 12/14/14 |
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