Publication 575 - Main Content


General Information

Definitions.   Some of the terms used in this publication are defined in the following paragraphs.

Pension.   A pension is generally a series of definitely determinable payments made to you after you retire from work. Pension payments are made regularly and are based on such factors as years of service and prior compensation.

Annuity.   An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. They can be either fixed (under which you receive a definite amount) or variable (not fixed). You can buy the contract alone or with the help of your employer.

Qualified employee plan.   A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify). To determine whether your plan is a qualified plan, check with your employer or the plan administrator.

Qualified employee annuity.   A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements.

Designated Roth account.   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Elective deferrals that are designated as Roth contributions are included in your income. However, qualified distributions (explained later) are not included in your income. You should check with your plan administrator to determine if your plan will accept designated Roth contributions.

Tax-sheltered annuity plan.   A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants.

Types of pensions and annuities.   Pensions and annuities include the following types.

Fixed-period annuities.   You receive definite amounts at regular intervals for a specified length of time.

Annuities for a single life.   You receive definite amounts at regular intervals for life. The payments end at death.

Joint and survivor annuities.   The first annuitant receives a definite amount at regular intervals for life. After he or she dies, a second annuitant receives a definite amount at regular intervals for life. The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant.

Variable annuities.   You receive payments that may vary in amount for a specified length of time or for life. The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund.

Disability pensions.   You receive disability payments because you retired on disability and have not reached minimum retirement age.

More than one program.   You may receive employee plan benefits from more than one program under a single trust or plan of your employer. If you participate in more than one program, you may have to treat each as a separate pension or annuity contract, depending upon the facts in each case. Also, you may be considered to have received more than one pension or annuity. Your former employer or the plan administrator should be able to tell you if you have more than one contract.

Example.

Your employer set up a noncontributory profit-sharing plan for its employees. The plan provides that the amount held in the account of each participant will be paid when that participant retires. Your employer also set up a contributory defined benefit pension plan for its employees providing for the payment of a lifetime pension to each participant after retirement.

The amount of any distribution from the profit-sharing plan depends on the contributions (including allocated forfeitures) made for the participant and the earnings from those contributions. Under the pension plan, however, a formula determines the amount of the pension benefits. The amount of contributions is the amount necessary to provide that pension.

Each plan is a separate program and a separate contract. If you get benefits from these plans, you must account for each separately, even though the benefits from both may be included in the same check.

Distributions from a designated Roth account are treated separately from other distributions from the plan.

Qualified domestic relations order (QDRO).   A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan. The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. A QDRO may not award an amount or form of benefit that is not available under the plan.

  A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant.

  A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant.

Variable Annuities

The tax rules in this publication apply both to annuities that provide fixed payments and to annuities that provide payments that vary in amount based on investment results or other factors. For example, they apply to commercial variable annuity contracts, whether bought by an employee retirement plan for its participants or bought directly from the issuer by an individual investor. Under these contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. The earnings are not taxed until distributed either in a withdrawal or in annuity payments. The taxable part of a distribution is treated as ordinary income.

Net investment income tax.   Beginning in 2013, annuities under a nonqualified plan are included in calculating your net investment income for the net investment income tax (NIIT). For information see the Instructions for Form 8960, Net Investment Income Tax — Individuals, Estates and Trusts.

For information on the tax treatment of a transfer or exchange of a variable annuity contract, see Transfers of Annuity Contracts under Taxation of Nonperiodic Payments, later.

Withdrawals.   If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan.

  If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. To the extent the amount withdrawn does not exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part).

  If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable.

  The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you have not previously recovered tax free. The rest is taxable.

  For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments , later. If you withdraw funds from your annuity before you reach age 59½, also see Tax on Early Distributions under Special Additional Taxes, later.

Annuity payments.   If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments , later. For a variable annuity paid under a qualified plan, you generally must use the Simplified Method. For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. For more information, see Variable annuities in Publication 939 under Computation Under the General Rule.

Death benefits.    If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. If you choose to receive an annuity, the payments are subject to tax as described above. If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. See Survivors and Beneficiaries , later.

Section 457 Deferred Compensation Plans

If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you.

Your 457(b) plan may have a designated Roth account option. If so, you may be able to roll over amounts to the designated Roth account or make contributions. Elective deferrals to a designated Roth account are included in your income. Qualified distributions (explained later) are not included in your income. See the Designated Roth accounts discussion under Taxation of Periodic Payments, later.

This publication covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525.

Is your plan eligible?   To find out if your plan is an eligible plan, check with your employer. Plans that are not eligible section 457 plans include the following:
  • Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans.

  • Nonelective deferred compensation plans for nonemployees (independent contractors).

  • Deferred compensation plans maintained by churches.

  • Length of service award plans for bona fide volunteer firefighters and emergency medical personnel. An exception applies if the total amount paid to a volunteer exceeds $3,000 for any year of service.

Disability Pensions

If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line 8 of Form 1040NR until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.

You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit, see Publication 524.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or on Form 1040NR, lines 17a and 17b.

Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Insurance Premiums for Retired Public Safety Officers

If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage for you, your spouse, or dependents. The distribution must be made directly from the plan to the insurance provider. You can exclude from income the smaller of the amount of the insurance premiums or $3,000. You can only make this election for amounts that would otherwise be included in your income. The amount excluded from your income cannot be used to claim a medical expense deduction.

An eligible retirement plan is a governmental plan that is:

  • a qualified trust,

  • a section 403(a) plan,

  • a section 403(b) annuity, or

  • a section 457(b) plan.

If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. The amount shown in box 2a of Form 1099-R does not reflect this exclusion. Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Enter “PSO” next to the appropriate line on which you report the taxable amount.

If you are retired on disability and reporting your disability pension on line 7 of Form 1040 or Form 1040A, or line 8 of Form 1040NR, include only the taxable amount on that line and enter “PSO” and the amount excluded on the dotted line next to the applicable line.

Railroad Retirement Benefits

Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.

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 you treat it for tax purposes like social security benefits. If you received, repaid, or had tax withheld from the SSEB portion of tier 1 benefits during 2013, you will receive Form RRB-1099, Payments by the Railroad Retirement Board (or Form RRB-1042S, Statement for Nonresident Alien Recipients of Payments by the Railroad Retirement Board, if you are a nonresident alien) from the U.S. Railroad Retirement Board (RRB).

For more information about the tax treatment of the SSEB portion of tier 1 benefits and Forms RRB-1099 and RRB-1042S, see Publication 915.

The second category contains the rest of the tier 1 railroad retirement benefits, called the non-social security equivalent benefit (NSSEB). It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Treat this category of benefits, shown on Form RRB-1099-R, 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. (The NSSEB and tier 2 benefits, less certain repayments, are combined into one amount called the Contributory Amount Paid on Form RRB-1099-R.) Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable. See Taxation of Periodic Payments , later, for information on how to report your benefits and how to recover the employee contributions tax free. Form RRB-1099-R is used for U.S. citizens, resident aliens, and nonresident aliens.

Nonresident aliens.   A nonresident alien is an individual who is not a citizen or a resident alien of the United States. Nonresident aliens are subject to mandatory U.S. tax withholding unless exempt under a tax treaty between the United States and their country of legal residency. A tax treaty exemption may reduce or eliminate tax withholding from railroad retirement benefits. See Tax withholding next for more information.

  If you are a nonresident alien and your tax withholding rate changed or your country of legal residence changed during the year, you may receive more than one Form RRB-1042S or Form RRB-1099-R. To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all forms you received for that year. For information on filing requirements for aliens, see Publication 519, U.S. Tax Guide for Aliens. For information on tax treaties between the United States and other countries that may reduce or eliminate U.S. tax on your benefits, see Publication 901, U.S. Tax Treaties.

Tax withholding.   To request or change your income tax withholding from SSEB payments, U.S. citizens should contact the IRS for Form W-4V, Voluntary Withholding Request, and file it with the RRB. To elect, revoke, or change your income tax withholding from NSSEB, tier 2, VDB, and supplemental annuity payments received, use Form RRB W-4P, Withholding Certificate for Railroad Retirement Payments. If you are a nonresident alien or a U.S. citizen living abroad, you should provide Form RRB-1001, Nonresident Questionnaire, to the RRB to furnish citizenship and residency information and to claim any treaty exemption from U.S. tax withholding. Nonresident U.S. citizens cannot elect to be exempt from withholding on payments delivered outside of the U.S.

Help from the RRB.   To request an RRB form or to get help with questions about an RRB benefit, you should contact your nearest RRB field office if you reside in the United States (call 1-877-772-5772 for the nearest field office) or U.S. consulate/Embassy if you reside outside the United States. You can visit the RRB on the Internet at www.rrb.gov.

Form RRB-1099-R.   The following discussion explains the items shown on Form RRB-1099-R. The amounts shown on this form are before any deduction for:
  • Federal income tax withholding,

  • Medicare premiums,

  • Legal process garnishment payments,

  • Recovery of a prior year overpayment of an NSSEB, tier 2 benefit, VDB, or supplemental annuity benefit, or

  • Recovery of Railroad Unemployment Insurance Act benefits received while awaiting payment of your railroad retirement annuity.

  The amounts shown on this form are after any offset for:
  • Social Security benefits,

  • Age reduction,

  • Public Service pensions or public disability benefits,

  • Dual railroad retirement entitlement under another RRB claim number,

  • Work deductions,

  • Legal process partition deductions,

  • Actuarial adjustment,

  • Annuity waiver, or

  • Recovery of a current-year overpayment of NSSEB, tier 2, VDB, or supplemental annuity benefits.

  The amounts shown on Form RRB-1099-R do not reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. To determine if any of these rules apply to your benefits, see the discussions about them later.

  Generally, amounts shown on your Form RRB-1099-R are considered a normal distribution. Use distribution code “7” if you are asked for a distribution code. Distribution codes are not shown on Form RRB-1099-R.

  There are three copies of this form. Copy B is to be included with your income tax return if federal income tax is withheld. Copy C is for your own records. Copy 2 is filed with your state, city, or local income tax return, when required. See the illustrated Copy B (Form RRB-1099-R) above.

  

  
Each beneficiary will receive his or her own Form RRB-1099-R. If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. So that you get your form timely, make sure the RRB always has your current mailing address.

Box 1—Claim Number and Payee Code.   Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. This is the number under which the RRB paid your benefits. Your payee code follows your claim number and is the last number in this box. It is used by the RRB to identify you under your claim number. In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box.

Box 2—Recipient's Identification Number.   This is the recipient's U.S. taxpayer identification number. It is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient.

If you are a resident or nonresident alien who must furnish a taxpayer identification number to the IRS and are not eligible to obtain an SSN, use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. The Instructions for Form W-7 explain how and when to apply.

Box 3—Employee Contributions.   This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. This amount is the employee's cost that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later.) The amount shown is the total employee contribution amount, not reduced by any amounts that the RRB calculated as previously recovered. It is the latest amount reported for 2013 and may have increased or decreased from a previous Form RRB-1099-R. If this amount has changed, the change is retroactive. You may need to refigure the tax-free part of your NSSEB/tier 2 benefit for 2013 and prior tax years. If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable.

  
If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contribution amount.

Box 4—Contributory Amount Paid.   This is the gross amount of the NSSEB and tier 2 benefit you received in 2013, less any 2013 benefits you repaid in 2013. (Any benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8.) This amount is the total contributory pension paid in 2013. It may be partly taxable and partly tax free or fully taxable. If you determine you are eligible to compute a tax-free part as explained later in Partly Taxable Payments under Taxation of Periodic Payments, use the latest reported employee contribution amount shown in box 3 as the cost.

Box 5—Vested Dual Benefit.   This is the gross amount of vested dual benefit (VDB) payments paid in 2013, less any 2013 VDB payments you repaid in 2013. It is fully taxable. VDB payments you repaid in 2013 for an earlier year or for an unknown year are shown in box 8.

Note.

The amounts shown in boxes 4 and 5 may represent payments for 2013 and/or other years after 1983.

Box 6—Supplemental Annuity.   This is the gross amount of supplemental annuity benefits paid in 2013, less any 2013 supplemental annuity benefits you repaid in 2013. It is fully taxable. Supplemental annuity benefits you repaid in 2013 for an earlier year or for an unknown year are shown in box 8.

Box 7—Total Gross Paid.   This is the sum of boxes 4, 5, and 6. The amount represents the total pension paid in 2013. Include this amount on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.

Box 8—Repayments.   This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2013 for years before 2013 or for unknown years. The amount shown in this box has not been deducted from the amounts shown in boxes 4, 5, and 6. It only includes repayments of benefits that were taxable to you. This means it only includes repayments in 2013 of NSSEB benefits paid after 1985, tier 2 and VDB benefits paid after 1983, and supplemental annuity benefits paid in any year. If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. For more information about repayments, see Repayment of benefits received in an earlier year , later.

  
You may have repaid an overpayment of benefits by returning a payment, by making a payment, or by having an amount withheld from your railroad retirement annuity payment.

Box 9—Federal Income Tax Withheld.   This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Include this on your income tax return as tax withheld. If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2013, you will receive more than one Form RRB-1099-R for 2013. Determine the total amount of U.S. federal income tax withheld from your 2013 RRB NSSEB, tier 2, VDB, and supplemental annuity payments by adding the amounts in box 9 of all original 2013 Forms RRB-1099-R, or the latest corrected or duplicate Forms RRB-1099-R you receive.

Box 10—Rate of Tax.   If you are taxed as a U.S. citizen or resident alien, this box does not apply to you. If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2013. If you are a nonresident alien whose tax was withheld at more than one rate during 2013, you will receive a separate Form RRB-1099-R for each rate change during 2013.

Box 11—Country.   If you are taxed as a U.S. citizen or resident alien, this box does not apply to you. If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2013. If you are a nonresident alien who was a resident of more than one country during 2013, you will receive a separate Form RRB-1099-R for each country of residence during 2013.

Box 12—Medicare Premium Total.   This is for information purposes only. The amount shown in this box represents the total amount of Part B Medicare premiums deducted from your railroad retirement annuity payments in 2013. Medicare premium refunds are not included in the Medicare total. The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident alien of the United States) or Form RRB-1042S (if you are a nonresident alien). However, if Form RRB-1099 or Form RRB-1042S is not required for 2013, then this total will be shown on Form RRB-1099-R. If your Medicare premiums were deducted from your social security benefits, paid by a third party, refunded to you, and/or you paid the premiums by direct billing, your Medicare total will not be shown in this box.

Repayment of benefits received in an earlier year.   If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it.

  If you repaid $3,000 or less in 2013, deduct it on Schedule A (Form 1040), line 23. The 2%-of-adjusted-gross-income limit applies to this deduction. You cannot take this deduction if you file Form 1040A.

   If you repaid more than $3,000 in 2013, you can either take a deduction for the amount repaid on Schedule A (Form 1040), line 28 or you can take a credit against your tax. For more information, see Repayments in Publication 525.

Withholding Tax and Estimated Tax

Your retirement plan distributions are subject to federal income tax withholding. However, you can choose not to have tax withheld on payments you receive unless they are eligible rollover distributions. (These are distributions, described later under Rollovers, that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA.) If you choose not to have tax withheld or if you do not have enough tax withheld, you may have to make estimated tax payments. See Estimated tax , later.

The withholding rules apply to the taxable part of payments you receive from:

  • An employer pension, annuity, profit-sharing, or stock bonus plan,

  • Any other deferred compensation plan,

  • A traditional individual retirement arrangement (IRA), or

  • A commercial annuity.

For this purpose, a commercial annuity means an annuity, endowment, or life insurance contract issued by an insurance company.

There will be no withholding on any part of a distribution where it is reasonable to believe that it will not be includible in gross income.

Choosing no withholding.   You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. You can make this choice on Form W-4P for periodic and nonperiodic payments. This choice generally remains in effect until you revoke it.

  The payer will ignore your choice not to have tax withheld if:
  • You do not give the payer your social security number (in the required manner), or

  • The IRS notifies the payer, before the payment is made, that you gave an incorrect social security number.

  To choose not to have tax withheld, a U.S. citizen or resident alien must give the payer a home address in the United States or its possessions. Without that address, the payer must withhold tax. For example, the payer has to withhold tax if the recipient has provided a U.S. address for a nominee, trustee, or agent to whom the benefits are delivered, but has not provided his or her own U.S. home address.

  If you do not give the payer a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to the payer that you are not a U.S. citizen, a U.S. resident alien, or someone who left the country to avoid tax. But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. This 30% rate will not apply if you are exempt or subject to a reduced rate by treaty. For details, get Publication 519.

Periodic payments.   Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated like wages for withholding purposes. Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). You should give the payer a completed withholding certificate (Form W-4P or a similar form provided by the payer). If you do not, tax will be withheld as if you were married and claiming three withholding allowances.

  Tax will be withheld as if you were single and were claiming no withholding allowances if:
  • You do not give the payer your social security number (in the required manner), or

  • The IRS notifies the payer (before any payment is made) that you gave an incorrect social security number.

  You must file a new withholding certificate to change the amount of withholding.

Nonperiodic distributions.    Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. You can also ask the payer to withhold an additional amount using Form W-4P. The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule.

Eligible rollover distribution.    If you receive an eligible rollover distribution, 20% of it generally will be withheld for income tax. You cannot choose not to have tax withheld from an eligible rollover distribution. However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. For more information about eligible rollover distributions, see Rollovers , later.

Estimated tax.   Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Generally, you must make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of:
  1. 90% of the tax to be shown on your 2014 return, or

  2. 100% of the tax shown on your 2013 return.

If your adjusted gross income for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2) above. For more information, get Publication 505, Tax Withholding and Estimated Tax.

In figuring your withholding or estimated tax, remember that a part of your monthly social security or equivalent tier 1 railroad retirement benefits may be taxable. See Publication 915. You can choose to have income tax withheld from those benefits. Use Form W-4V to make this choice.

Cost (Investment in the Contract)

Distributions from your pension or annuity plan may include amounts treated as a recovery of your cost (investment in the contract). If any part of a distribution is treated as a recovery of your cost under the rules explained in this publication, that part is tax free. Therefore, the first step in figuring how much of a distribution is taxable is to determine the cost of your pension or annuity.

In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. This includes the amounts your employer contributed that were taxable to you when paid. (However, see Foreign employment contributions , later.) It does not include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted). It also does not include amounts you contributed for health and accident benefits (including any additional premiums paid for double indemnity or disability benefits).

From this total cost you must subtract the following amounts.

  1. Any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income and that you received by the later of the annuity starting date or the date on which you received your first payment.

  2. Any other tax-free amounts you received under the contract or plan by the later of the dates in (1).

  3. If you must use the Simplified Method for your annuity payments, the tax-free part of any single-sum payment received in connection with the start of the annuity payments, regardless of when you received it. (See Simplified Method , later, for information on its required use.)

  4. If you use the General Rule for your annuity payments, the value of the refund feature in your annuity contract. (See General Rule , later, for information on its use.) Your annuity contract has a refund feature if the annuity payments are for your life (or the lives of you and your survivor) and payments in the nature of a refund of the annuity's cost will be made to your beneficiary or estate if all annuitants die before a stated amount or a stated number of payments are made. For more information, see Publication 939.

The tax treatment of the items described in (1) through (3) is discussed later under Taxation of Nonperiodic Payments .

Form 1099-R. If you began receiving periodic payments of a life annuity in 2013, the payer should show your total contributions to the plan in box 9b of your 2013 Form 1099-R.

Annuity starting date defined.   Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed.

Example.

On January 1, you completed all your payments required under an annuity contract providing for monthly payments starting on August 1 for the period beginning July 1. The annuity starting date is July 1. This is the date you use in figuring the cost of the contract and selecting the appropriate number from Table 1 for line 3 of the Simplified Method Worksheet.

Designated Roth accounts.   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Your cost will also include any in-plan Roth rollovers you included in income.

Foreign employment contributions.   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. The contributions that apply are:
  1. Contributions before 1963 by your employer,

  2. Contributions after 1962 by your employer if the contributions would be excludible from your gross income (not including the foreign earned income exclusion) had they been paid directly to you, or

  3. Contributions after 1996 by your employer if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) but only if the contributions would be excludible from your gross income had they been paid directly to you.

Foreign employment contributions while a nonresident alien.   In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions in 2013 from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the contribution:
  • Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and

  • Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.

Taxation of Periodic Payments

This section explains how the periodic payments you receive from a pension or annuity plan are taxed. Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). These payments are also known as amounts received as an annuity. If you receive an amount from your plan that is not a periodic payment, see Taxation of Nonperiodic Payments , later.

In general, you can recover the cost of your pension or annuity tax free over the period you are to receive the payments. The amount of each payment that is more than the part that represents your cost is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier).

Designated Roth accounts.   If you receive a qualified distribution from a designated Roth account, the distribution is not included in your gross income. This applies to both your cost in the account and income earned on that account. A qualified distribution is generally a distribution that is:
  • Made after a 5-tax-year period of participation, and

  • Made on or after the date you reach age 59½, made to a beneficiary or your estate on or after your death, or attributable to your being disabled.

  If the distribution is not a qualified distribution, the rules discussed in this section apply. The designated Roth account is treated as a separate contract.

Period of participation.   The 5-tax-year period of participation is the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. Therefore, for designated Roth contributions made for 2013, the first year for which a qualified distribution can be made is 2018.

  However, if a direct rollover is made to the plan from a designated Roth account under another plan, the 5-tax-year period for the recipient plan begins with the first tax year for which the participant first had designated Roth contributions made to the other plan.

  Your 401(k), 403(b), or 457(b) plan may permit you to roll over amounts from those plans to a designated Roth account within the same plan. This is known as an in-plan Roth rollover. For more details, see In-plan Roth rollovers , later.

Fully Taxable Payments

The pension or annuity payments that you receive are fully taxable if you have no cost in the contract because any of the following situations applies to you (however, see Insurance Premiums for Retired Public Safety Officers , earlier).

  • You did not pay anything or are not considered to have paid anything for your pension or annuity. Amounts withheld from your pay on a tax-deferred basis are not considered part of the cost of the pension or annuity payment.

  • Your employer did not withhold contributions from your salary.

  • You got back all of your contributions tax free in prior years (however, see Exclusion not limited to cost under Partly Taxable Payments, later).

Report the total amount you got on Form 1040, line 16b; Form 1040A, line 12b; or on Form 1040NR, line 17b. You should make no entry on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a.

Deductible voluntary employee contributions.   Distributions you receive that are based on your accumulated deductible voluntary employee contributions are generally fully taxable in the year distributed to you. Accumulated deductible voluntary employee contributions include net earnings on the contributions. If distributed as part of a lump sum, they do not qualify for the 10-year tax option or capital gain treatment, explained later.

Partly Taxable Payments

If you have a cost to recover from your pension or annuity plan (see Cost (Investment in the Contract) , earlier), you can exclude part of each annuity payment from income as a recovery of your cost. This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. The rest of each payment is taxable (however, see Insurance Premiums for Retired Public Safety Officers , earlier).

You figure the tax-free part of the payment using one of the following methods.

You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost.

If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately.

Qualified plan annuity starting before November 19, 1996.   If your annuity is paid under a qualified plan and your annuity starting date (defined earlier under Cost (Investment in the Contract) ) is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the Simplified Method or the General Rule. If your annuity starting date is before July 2, 1986, you use the General Rule unless your annuity qualified for the Three-Year Rule. If you used the Three-Year Rule (which was repealed for annuities starting after July 1, 1986), your annuity payments are generally now fully taxable.

Exclusion limit.   Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Once your annuity starting date is determined, it does not change. If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet.

Exclusion limited to cost.   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. This deduction is not subject to the 2%-of-adjusted-gross-income limit.

Example 1.

Your annuity starting date is after 1986, and you exclude $100 a month ($1,200 a year) under the Simplified Method. The total cost of your annuity is $12,000. Your exclusion ends when you have recovered your cost tax free, that is, after 10 years (120 months). After that, your annuity payments are generally fully taxable.

Example 2.

The facts are the same as in Example 1, except you die (with no surviving annuitant) after the eighth year of retirement. You have recovered tax free only $9,600 (8 × $1,200) of your cost. An itemized deduction for your unrecovered cost of $2,400 ($12,000 – $9,600) can be taken on your final return.

Exclusion not limited to cost.   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost.

Simplified Method

Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract.

Who must use the Simplified Method.   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you meet both of the following conditions.
  1. You receive your pension or annuity payments from any of the following plans.

    1. A qualified employee plan.

    2. A qualified employee annuity.

    3. A tax-sheltered annuity plan (403(b) plan).

  2. On your annuity starting date, at least one of the following conditions applies to you.

    1. You are under age 75.

    2. You are entitled to less than 5 years of guaranteed payments.

Guaranteed payments.   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments.

Annuity starting before November 19, 1996.   If your annuity starting date is after July 1, 1986, and before November 19, 1996, and you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. You could have chosen to use the Simplified Method if your annuity is payable for your life (or the lives of you and your survivor annuitant) and you met both of the conditions listed earlier under Who must use the Simplified Method .

Who cannot use the Simplified Method.   You cannot use the Simplified Method if you receive your pension or annuity from a nonqualified plan or otherwise do not meet the conditions described in the preceding discussion. See General Rule , later.

How to use the Simplified Method.    Complete Worksheet A in the back of this publication to figure your taxable annuity for 2013. Be sure to keep the completed worksheet; it will help you figure your taxable annuity next year.

  To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. How you do this depends on whether the annuity is for a single life, multiple lives, or a fixed period. For this purpose, treat an annuity that is payable over the life of an annuitant as payable for that annuitant's life even if the annuity has a fixed-period feature or also provides a temporary annuity payable to the annuitant's child under age 25.

  
You do not need to complete line 3 of the worksheet or make the computation on line 4 if you received annuity payments last year and used last year's worksheet to figure your taxable annuity. Instead, enter the amount from line 4 of last year's worksheet on line 4 of this year's worksheet.

Single-life annuity.   If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for your age on your annuity starting date. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996.

Multiple-lives annuity.   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Enter on line 3 the number shown for the annuitants' combined ages on the annuity starting date. For an annuity payable to you as the primary annuitant and to more than one survivor annuitant, combine your age and the age of the youngest survivor annuitant. For an annuity that has no primary annuitant and is payable to you and others as survivor annuitants, combine the ages of the oldest and youngest annuitants. Do not treat as a survivor annuitant anyone whose entitlement to payments depends on an event other than the primary annuitant's death.

  However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Instead, you must use Table 1 at the bottom of the worksheet and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. This number will differ depending on whether your annuity starting date is before November 19, 1996, or after November 18, 1996.

Fixed-period annuity.   If your annuity does not depend in whole or in part on anyone's life expectancy, the total number of expected monthly payments to enter on line 3 of the worksheet is the number of monthly annuity payments under the contract.

Line 6.   The amount on line 6 should include all amounts that could have been recovered in prior years. If you did not recover an amount in a prior year, you may be able to amend your returns for the affected years.

Example.

Bill Smith, age 65, began receiving retirement benefits in 2013 under a joint and survivor annuity. Bill's annuity starting date is January 1, 2013. The benefits are to be paid for the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.

Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of Worksheet A in completing line 3 of the worksheet. His completed worksheet is shown later.

Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments are paid must be included in gross income.

If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. This deduction is not subject to the 2%-of-adjusted-gross-income limit.

Worksheet A. Simplified Method Worksheet for Bill Smith

1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a 1. $14,400
2. Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion.* See Cost (Investment in the Contract) , earlier 2. 31,000
  Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Otherwise, go to line 3.    
3. Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. 310
4. Divide line 2 by the number on line 3 4. 100
5. Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6 5. 1,200
6. Enter any amount previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year 6. -0-
7. Subtract line 6 from line 2 7. 31,000
8. Enter the smaller of line 5 or line 7 8. 1,200
9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers , earlier, before entering an amount on your tax return 9. $13,200
10. Was your annuity starting date before 1987? 
□ Yes. STOP. Do not complete the rest of this worksheet. 
☑ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2013. You will need this number if you need to fill out this worksheet next year
10. 1,200
11. Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable 11. $29,800
       
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
       
  Table 1 for Line 3 Above  
    AND your annuity starting date was—  
  IF the age at annuity 
starting date was...
BEFORE November 19, 
1996, enter on line 3...
AFTER November 18, 
1996, enter on line 3...
 
  55 or under 300 360  
  56-60 260 310  
  61-65 240 260  
  66-70 170 210  
  71 or older 120 160  
  Table 2 for Line 3 Above  
  IF the combined ages at  
annuity starting date were...
THEN enter 
on line 3...
 
  110 or under   410  
  111-120   360  
  121-130   310  
  131-140   260  
  141 or older   210  

Multiple annuitants.   If you and one or more other annuitants receive payments at the same time, you exclude from each annuity payment a pro rata share of the monthly tax-free amount. Figure your share by taking the following steps.
  1. Complete your worksheet through line 4 to figure the monthly tax-free amount.

  2. Divide the amount of your monthly payment by the total amount of the monthly payments to all annuitants.

  3. Multiply the amount on line 4 of your worksheet by the amount figured in (2) above. The result is your share of the monthly tax-free amount.

  Replace the amount on line 4 of the worksheet with the result in (3) above. Enter that amount on line 4 of your worksheet each year.

General Rule

Under the General Rule, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return. Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. To figure it, you must use life expectancy (actuarial) tables prescribed by the IRS.

Who must use the General Rule.   You must use the General Rule if you receive pension or annuity payments from:
  • A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or

  • A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years.

Annuity starting before November 19, 1996.   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. You also had to use it for any fixed-period annuity. If you did not have to use the General Rule, you could have chosen to use it. If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule.

  If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost.

Who cannot use the General Rule.   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. See Simplified Method , earlier.

More information.   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939.

Taxation of Nonperiodic Payments

This section of the publication explains how any nonperiodic distributions you receive under a pension or annuity plan are taxed. Nonperiodic distributions are also known as amounts not received as an annuity. They include all payments other than periodic payments and corrective distributions.

For example, the following items are treated as nonperiodic distributions.

  • Cash withdrawals.

  • Distributions of current earnings (dividends) on your investment. However, do not include these distributions in your income to the extent the insurer keeps them to pay premiums or other consideration for the contract.

  • Certain loans. See Loans Treated as Distributions , later.

  • The value of annuity contracts transferred without full and adequate consideration. See Transfers of Annuity Contracts , later.

Corrective distributions of excess plan contributions.   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Although the plan reports the corrective distributions on Form 1099-R, the distribution is not treated as a nonperiodic distribution from the plan. It is not subject to the allocation rules explained in the following discussion, it cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.

  
If your retirement plan made a corrective distribution of excess amounts (excess deferrals, excess contributions, or excess annual additions), your Form 1099-R should have the code “8,” “B,” “P,” or “E” in box 7.

  For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525.

Figuring the Taxable Amount

How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982.

You may be able to roll over the taxable amount of a nonperiodic distribution from a qualified retirement plan into another qualified retirement plan or a traditional IRA tax free. See Rollovers, later. If you do not make a tax-free rollover and the distribution qualifies as a lump-sum distribution, you may be able to elect an optional method of figuring the tax on the taxable amount. See Lump-Sum Distributions, later.

Annuity starting date.   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later.

Distributions of employer securities.    If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. The NUA is the net increase in the securities' value while they were in the trust. This tax deferral applies to distributions of the employer corporation's stocks, bonds, registered debentures, and debentures with interest coupons attached.

  If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution.

   A lump-sum distribution for this purpose is the distribution or payment of a plan participant's entire balance (within a single tax year) from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans), but only if paid:
  • Because of the plan participant's death,

  • After the participant reaches age 59½,

  • Because the participant, if an employee, separates from service, or

  • After the participant, if a self-employed individual, becomes totally and permanently disabled.

  
If you choose to include NUA in your income for the year of the distribution and the participant was born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods described under Lump-Sum Distributions, later.

  If the distribution is not a lump-sum distribution, tax is deferred only on the NUA resulting from employee contributions other than deductible voluntary employee contributions.

  The NUA on which tax is deferred should be shown in box 6 of the Form 1099-R you receive from the payer of the distribution.

  When you sell or exchange employer securities with tax-deferred NUA, any gain is long-term capital gain up to the amount of the NUA that is not included in your basis in the employer securities. Any gain that is more than the NUA is long-term or short-term gain, depending on how long you held the securities after the distribution.

  Your basis in the employer securities is the total of the following amounts.
  • Your contributions to the plan that are attributable to the securities.

  • Your employer's contributions that were taxed as ordinary income in the year the securities were distributed.

  • Your NUA in the securities that is attributable to employer contributions and taxed as ordinary income in the year the securities were distributed.

How to report.   Enter the total amount of a nonperiodic distribution on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Enter the taxable amount of the distribution on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. However, if you make a tax-free rollover or elect an optional method of figuring the tax on a lump-sum distribution, see How to report in the discussions of those tax treatments, later.

Distribution On or After Annuity Starting Date

If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. For example, a cost-of-living increase in your pension after the annuity starting date is an amount not received as an annuity and, as such, is fully taxable.

Reduction in subsequent payments.   If the annuity payments you receive are reduced because you received a nonperiodic distribution, you can exclude part of the nonperiodic distribution from gross income. The part you can exclude is equal to your cost in the contract reduced by any tax-free amounts you previously received under the contract, multiplied by a fraction. The numerator is the reduction in each annuity payment because of the nonperiodic distribution. The denominator is the full unreduced amount of each annuity payment originally provided for.

Single-sum in connection with the start of annuity payments.   If you receive a single-sum payment on or after your annuity starting date in connection with the start of annuity payments for which you must use the Simplified Method, treat the single-sum payment as if it were received before your annuity starting date. (See Simplified Method under Taxation of Periodic Payments, earlier, for information on its required use.) Follow the rules discussed under Distribution Before Annuity Starting Date From a Qualified Plan , later.

Distribution in full discharge of contract.   You may receive an amount on or after the annuity starting date that fully satisfies the payer's obligation under the contract. The amount may be a refund of what you paid for the contract or for the complete surrender, redemption, or maturity of the contract. Include the amount in gross income only to the extent that it exceeds the remaining cost of the contract.

Distribution Before Annuity Starting Date From a Qualified Plan

If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. You exclude from your gross income the part that you allocate to the cost. You include the remainder in your gross income.

For this purpose, a qualified retirement plan is:

  • A qualified employee plan (or annuity contract purchased by such a plan),

  • A qualified employee annuity plan, or

  • A tax-sheltered annuity plan (403(b) plan).

Use the following formula to figure the tax-free amount of the distribution.

           
  Amount received x Cost of contract = Tax-free amount
  Account balance

For this purpose, your account balance includes only amounts to which you have a nonforfeitable right (a right that cannot be taken away).

Example.

Ann Brown received a $50,000 distribution from her retirement plan before her annuity starting date. She had $10,000 invested (cost) in the plan. Her account balance was $100,000. She can exclude $5,000 of the $50,000 distribution, figured as follows:

           
  $50,000 x $10,000 = $5,000
  $100,000

Defined contribution plan.   A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contributions) would not be considered part of that separate contract.

Example.   Ryan participates in a defined contribution plan that treats employee contributions and earnings allocable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity starting date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allocable to the employer contributions were $2,500.

  To determine the tax-free amount of Ryan's distribution, use the same formula shown above. However, because employee contributions are treated as a separate contract, the account balance would be the total of Ryan's contributions and allocable earnings.

  Thus the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 − $4,000).

  If the employee contributions were not treated as a separate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 − $2,000).

Plans that permitted withdrawal of employee contributions.   If you contributed before 1987 to a pension plan that, as of May 5, 1986, permitted you to withdraw your contributions before your separation from service, any distribution before your annuity starting date is tax free to the extent that it, when added to earlier distributions received after 1986, does not exceed your cost as of December 31, 1986. Apply the allocation described in the preceding discussion only to any excess distribution.

Distribution Before Annuity Starting Date From a Nonqualified Plan

If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. You include in your gross income the smaller of:

  • The nonperiodic distribution, or

  • The amount by which the cash value of the contract (figured without considering any surrender charge) immediately before you receive the distribution exceeds your investment in the contract at that time.

Example.

You bought an annuity from an insurance company. Before the annuity starting date under your annuity contract, you received a $7,000 distribution. At the time of the distribution, the annuity had a cash value of $16,000 and your investment in the contract was $10,000. The distribution is allocated first to earnings, so you must include $6,000 ($16,000 − $10,000) in your gross income. The remaining $1,000 ($7,000 − $6,000) is a tax-free return of part of your investment.

Exception to allocation rule.   Certain nonperiodic distributions received before the annuity starting date are not subject to the allocation rule in the preceding discussion. Instead, you include the amount of the payment in gross income only to the extent that it exceeds the cost of the contract.

  This exception applies to the following distributions.
  • Distributions in full discharge of a contract that you receive as a refund of what you paid for the contract or for the complete surrender, redemption, or maturity of the contract.

  • Distributions from life insurance or endowment contracts (other than modified endowment contracts, as defined in section 7702A of the Internal Revenue Code) that are not received as an annuity under the contracts.

  • Distributions under contracts entered into before August 14, 1982, to the extent that they are allocable to your investment before August 14, 1982.

  If you bought an annuity contract before August 14, 1982, and made investments both before and after August 14, 1982, the distributed amounts are allocated to your investment or to earnings in the following order.
  1. The part of your investment that was made before August 14, 1982. This part of the distribution is tax free.

  2. The earnings on the part of your investment that was made before August 14, 1982. This part of the distribution is taxable.

  3. The earnings on the part of your investment that was made after August 13, 1982. This part of the distribution is taxable.

  4. The part of your investment that was made after August 13, 1982. This part of the distribution is tax free.

The taxable portion of distributions from nonqualified plans are subject to the net investment income tax. See the Instructions for Form 8960.

Distribution of U.S. savings bonds.    If you receive U.S. savings bonds in a taxable distribution from a retirement or profit-sharing plan, report the value of the bonds at the time of distribution as income. The value of the bonds includes accrued interest. When you cash the bonds, your Form 1099-INT will show the total interest accrued, including the part you reported when the bonds were distributed to you. For information on how to adjust your interest income for U.S. savings bond interest you previously reported, see How To Report Interest Income in chapter 1 of Publication 550, Investment Income and Expenses.

Loans Treated as Distributions

If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless it qualifies for the exception to this loan-as-distribution rule explained later. This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign (or agree to pledge or assign). It applies to loans from both qualified and nonqualified plans, including commercial annuity contracts you purchase directly from the issuer. Further, it applies if you renegotiate, extend, renew, or revise a loan that qualified for the exception below if the altered loan does not qualify. In that situation, you must treat the outstanding balance of the loan as a distribution on the date of the transaction.

You determine how much of the loan is taxable using the allocation rules for nonperiodic distributions discussed under Figuring the Taxable Amount , earlier. The taxable part may be subject to the additional tax on early distributions. It is not an eligible rollover distribution and does not qualify for the 10-year tax option.

Exception for qualified plan, 403(b) plan, and government plan loans.   At least part of certain loans under a qualified employee plan, qualified employee annuity, tax-sheltered annuity (403(b) plan), or government plan is not treated as a distribution from the plan. This exception to the loan-as-distribution rule applies only to a loan that either:
  • Is used to acquire your main home, or

  • Must be repaid within 5 years.

  If a loan qualifies for this exception, you must treat it as a nonperiodic distribution only to the extent that the loan, when added to the outstanding balances of all your loans from all plans of your employer (and certain related employers, defined later) exceeds the lesser of:
  • $50,000, or

  • Half the present value (but not less than $10,000) of your nonforfeitable accrued benefit under the plan, determined without regard to any accumulated deductible employee contributions.

  You must reduce the $50,000 amount if you already had an outstanding loan from the plan during the 1-year period ending the day before you took out the loan. The amount of the reduction is your highest outstanding loan balance during that period minus the outstanding balance on the date you took out the new loan. If this amount is zero or less, ignore it.

Substantially level payments.   To qualify for the exception to the loan-as-distribution rule, the loan must require substantially level payments at least quarterly over the life of the loan. If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan. This level payment requirement does not apply to the period in which you are on a leave of absence without pay or with a rate of pay that is less than the required installment. Generally, this leave of absence must not be longer than 1 year. You must repay the loan within 5 years from the date of the loan (unless the loan was used to acquire your main home). Your installment payments after the leave ends must not be less than your original payments.

  However, if your plan suspends your loan payments for any part of the period during which you are in the uniformed services, you will not be treated as having received a distribution even if the suspension is for more than 1 year and the term of the loan is extended. The loan payments must resume upon completion of such period and the loan must be repaid in substantially level installments within 5 years from the date of the loan (unless the loan was used to acquire your main home) plus the period of suspension.

Example 1.

On May 1, 2013, you borrowed $40,000 from your retirement plan. The loan was to be repaid in level monthly installments over 5 years. The loan was not used to acquire your main home. You make nine monthly payments and start an unpaid leave of absence that lasts for 12 months. You were not in a uniformed service during this period. After the leave period ends and you resume active employment, you resume making repayments on the loan. You must repay this loan by April 30, 2018 (5 years from the date of this loan). You can increase your monthly installments or you can make the original monthly installments and on April 30, 2018, pay the balance.

Example 2.

The facts are the same as in Example 1, except that you are on a leave of absence performing service in the uniformed services for 2 years. The loan payments were suspended for that period. You must resume making loan payments at the end of that period and the loan must be repaid by April 30, 2020 (5 years from the date of the loan plus the period of suspension, which is 2 years in this example).

Related employers and related plans.   In determining loan balances for purposes of applying the exception to the loan-as-distribution rule, you must add the balances of all your loans from all plans of your employer and from all plans of your employers who are treated as a single employer. Treat separate employers' plans as plans of a single employer if they are treated that way under other qualified retirement plan rules because the employers are related.

  Employers are related if they are:
  • Members of a controlled group of corporations,

  • Businesses under common control, or

  • Members of an affiliated service group.

  An affiliated service group generally is two or more service organizations whose relationship involves an ownership connection. Their relationship also includes the regular or significant performance of services by one organization for or in association with another.

Denial of interest deduction.   If the loan from a qualified plan is not treated as a distribution because the exception applies, you cannot deduct any of the interest on the loan during any period that:
  • The loan is secured by amounts from elective deferrals under a qualified cash or deferred arrangement (section 401(k) plan) or a salary reduction agreement to purchase a tax-sheltered annuity, or

  • You are a key employee as defined in section 416(i) of the Internal Revenue Code.

Reporting by plan.    If your loan is treated as a distribution, you should receive a Form 1099-R showing code “L” in box 7.

Effect on investment in the contract.    If your loan is treated as a distribution, you must reduce your investment in the contract to the extent that the distribution is tax free under the allocation rules or qualified plans explained earlier. Repayments of the loan increase your investment in the contract to the extent that the distribution is taxable under those rules.

  If you receive a loan under a nonqualified plan other than a 403(b) plan, including a commercial annuity contract that you purchase directly from the issuer, you increase your investment in the contract to the extent that the distribution is taxable under the general allocation rule for nonqualified plans explained earlier. Repayments of the loan do not affect your investment in the contract. However, if the distribution is excepted from the general allocation rule (for example, because it is made under a contract entered into before August 14, 1982), you reduce your investment in the contract to the extent that the distribution is tax free and increase it for loan repayments to the extent that the distribution is taxable.

Transfers of Annuity Contracts

If you transfer without full and adequate consideration an annuity contract issued after April 22, 1987, you are treated as receiving a nonperiodic distribution. The distribution equals the excess of:

  • The cash surrender value of the contract at the time of transfer, over

  • Your investment in the contract at that time.

This rule does not apply to transfers between spouses or transfers between former spouses incident to a divorce.

Tax-free exchange.   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income.

If you transfer a full or partial interest in a tax-sheltered annuity that is not subject to restrictions on early distributions to another tax-sheltered annuity, the transfer qualifies for nonrecognition of gain or loss.

If you exchange an annuity contract issued by a life insurance company that is subject to a rehabilitation, conservatorship, or similar state proceeding for an annuity contract issued by another life insurance company, the exchange qualifies for nonrecognition of gain or loss. The exchange is tax free even if the new contract is funded by two or more payments from the old annuity contract. This also applies to an exchange of a life insurance contract for a life insurance, endowment, annuity, or a qualified long-term care insurance contract.

If you transfer part of the cash surrender value of an existing annuity contract for a new annuity contract issued by another insurance company, the transfer qualifies for nonrecognition of gain or loss. The funds must be transferred directly between the insurance companies. Your investment in the original contract immediately before the exchange is allocated between the contracts based on the percentage of the cash surrender value allocated to each contract.

Example.

You own an annuity contract issued by ABC Insurance. You assign 60% of the cash surrender value of that contract to DEF Insurance to purchase an annuity contract. The funds are transferred directly between the insurance companies. You do not recognize any gain or loss on the transaction. After the exchange, your investment in the new contract is equal to 60% of your investment in the old contract immediately before the exchange. Your investment in the old contract is equal to 40% of your original investment in that contract.

Tax-free transfers for certain cash distributions.   If you receive cash from the surrender of one contract and invest the cash in another contract, you generally do not have a tax-free transfer. However, you can elect to receive tax-free treatment for a cash distribution from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding if all of the following conditions are met.
  • You withdraw all the cash to which you are entitled.

  • You reinvest the proceeds within 60 days in a single contract issued by another insurance company.

  • You assign all rights to any future distributions to the new issuer if the cash distribution is restricted by the state proceeding to an amount that is less than required for full settlement.

  • An exchange of these contracts would otherwise qualify as a tax-free transfer.

  You must give the new issuer a statement containing the following information.
  • The amount of cash distributed under the old contract.

  • The amount of cash reinvested in the new contract.

  • Your investment in the old contract on the date of the initial distribution.

  You must also attach the following items to your timely filed income tax return for the year of the initial distribution.
  • A copy of the statement you gave to the new issuer.

  • A statement that contains the words “ELECTION UNDER REV. PROC. 92-44,” the new issuer's name, and the policy number or similar identifying information for the new contract.

Tax-free exchange reported on Form 1099-R.   If you make a tax-free exchange of an annuity contract for another annuity contract issued by a different company, the exchange will be shown on Form 1099-R with a code “6” in box 7. You need not report this on your tax return.

Date of purchase of contract received in a tax-free exchange.   If you acquire an annuity contract in a tax-free exchange for another annuity contract, its date of purchase is the date you purchased the annuity you exchanged. This rule applies for determining if the annuity qualifies for exemption from the tax on early distributions as an immediate annuity. See Tax on Early Distributions , later.

Lump-Sum Distributions

This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier.

A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Additionally, a lump-sum distribution is a distribution that was paid:

  • Because of the plan participant's death,

  • After the participant reaches age 59½,

  • Because the participant, if an employee, separates from service, or

  • After the participant, if a self-employed individual, becomes totally and permanently disabled.

A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution.

The participant's entire balance from a plan does not include certain forfeited amounts. It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987.

If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part.

Each individual, estate, or trust who receives part of a lump-sum distribution on behalf of a plan participant who was born before January 2, 1936, can choose whether to elect the optional methods for the part each received. However, if two or more trusts receive the distribution, the plan participant or the personal representative of a deceased participant must make the choice.

Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. The tax figured on Form 4972 is added to the regular tax figured on your other income. This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax.

Alternate payee under qualified domestic relations order.   If you receive a distribution as an alternate payee under a qualified domestic relations order (discussed earlier under General Information ), you may be able to choose the optional tax computations for it. You can make this choice for a distribution that would be treated as a lump-sum distribution had it been received by your spouse or former spouse (the plan participant). However, for this purpose, the balance to your credit does not include any amount payable to the plan participant.

  If you choose an optional tax computation for a distribution received as an alternate payee, this choice will not affect any election for distributions from your own plan.

More than one recipient.   One or all of the recipients of a lump-sum distribution can use the optional tax computations. See Multiple recipients of a lump-sum distribution in the Instructions for Form 4972.

Reemployment.   A separated employee's vested percentage in his or her retirement benefit may increase if he or she is rehired by the employer within five years following separation from service. This possibility does not prevent a distribution made before reemployment from qualifying as a lump-sum distribution. However, if the employee elected an optional method of figuring the tax on the distribution and his or her vested percentage in the previous retirement benefit increases after reemployment, the employee must recapture the tax saved. This is done by increasing the tax for the year in which the increase in vesting first occurs.

Distributions that do not qualify.   The following distributions do not qualify as lump-sum distributions for the capital gain treatment or 10-year tax option.
  • The part of a distribution not rolled over if the distribution is partially rolled over to another qualified plan or an IRA.

  • Any distribution if an earlier election to use either the 5- or 10-year tax option had been made after 1986 for the same plan participant.

  • U.S. Retirement Plan Bonds distributed with a lump sum.

  • Any distribution made during the first five tax years that the participant was in the plan, unless it was made because the participant died.

  • The current actuarial value of any annuity contract included in the lump sum. (Form 1099-R, box 8, should show this amount, which you use only to figure tax on the ordinary income part of the distribution.)

  • Any distribution to a 5% owner that is subject to penalties under section 72(m)(5)(A) of the Internal Revenue Code.

  • A distribution from an IRA.

  • A distribution from a tax-sheltered annuity (section 403(b) plan).

  • A distribution of the redemption proceeds of bonds rolled over tax free to a qualified pension plan, etc., from a qualified bond purchase plan.

  • A distribution from a qualified plan if the participant or his or her surviving spouse previously received an eligible rollover distribution from the same plan (or another plan of the employer that must be combined with that plan for the lump-sum distribution rules) and the previous distribution was rolled over tax free to another qualified plan or an IRA.

  • A distribution from a qualified plan that received a rollover after 2001 from an IRA (other than a conduit IRA), a governmental section 457 plan, or a section 403(b) tax-sheltered annuity on behalf of the plan participant.

  • A distribution from a qualified plan that received a rollover after 2001 from another qualified plan on behalf of that plan participant's surviving spouse.

  • A corrective distribution of excess deferrals, excess contributions, excess aggregate contributions, or excess annual additions.

  • A lump-sum credit or payment from the Federal Civil Service Retirement System (or the Federal Employees' Retirement System).

How to treat the distribution.   If you receive a lump-sum distribution, you may have the following options for how to treat the taxable part.
  • Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income.

  • Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).

  • Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).

  • Roll over all or part of the distribution. See Rollovers , later. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.

  • Report the entire taxable part of the distribution as ordinary income on your tax return.

  The first three options are explained in the following discussions.

Electing optional lump-sum treatment.   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant.

   Complete Form 4972 and attach it to your Form 1040 if you choose to use one or both of the tax options. If you received more than one lump-sum distribution for a plan participant during the year, you must add them together in your computation. If you and your spouse are filing a joint return and you both have received a lump-sum distribution, each of you should complete a separate Form 4972.

Time for choosing.   You must decide to use the tax options before the end of the time, including extensions, for making a claim for credit or refund of tax. This is usually 3 years after the date the return was filed or 2 years after the date the tax was paid, whichever is later. (Returns filed before their due date are considered filed on their due date.)

Changing your mind.   You can change your mind and decide not to use the tax options within the time period just discussed. If you change your mind, file Form 1040X, Amended U.S. Individual Income Tax Return, with a statement saying you do not want to use the optional lump-sum treatment. Generally, you must pay any additional tax due to the change with the Form 1040X.

How to report.   If you elect capital gain treatment (but not the 10-year tax option) for a lump-sum distribution, include the ordinary income part of the distribution on Form 1040, lines 16a and 16b, or on Form 1040NR, lines 17a and 17b. Enter the capital gain part of the distribution in Part II of Form 4972. Include the tax from Form 4972, line 7 in the total on Form 1040, line 44, or on Form 1040NR, line 42.

  If you elect the 10-year tax option, do not include any part of the distribution on Form 1040, lines 16a or 16b, or on Form 1040NR, lines 17a or 17b. Report the entire distribution in Part III of Form 4972 or, if you also elect capital gain treatment, report the capital gain part in Part II and the ordinary income part in Part III. Include the tax from Form 4972, line 30 in the total on Form 1040, line 44, or on Form 1040NR, line 42.

Taxable and tax-free parts of the distribution.   The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free.

Cost.   In general, your cost is the total of:
  • The plan participant's nondeductible contributions to the plan,

  • The plan participant's taxable costs of any life insurance contract distributed,

  • Any employer contributions that were taxable to the plan participant, and

  • Repayments of any loans that were taxable to the plan participant.

You must reduce this cost by amounts previously distributed tax free.

Net unrealized appreciation (NUA).   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. (See Distributions of employer securities under Figuring the Taxable Amount, earlier.) However, if you choose to include the NUA in your income for the year of the distribution and there is an amount in box 3 of Form 1099-R, part of the NUA will qualify for capital gain treatment. Use the NUA Worksheet in the instructions for Form 4972 to find the part that qualifies.

Losses.    You may be able to claim a loss on your return if you receive a lump-sum distribution that is less than the plan participant's cost. You must receive the distribution entirely in cash or worthless securities. The amount you can claim is the difference between the participant's cost and the amount of the cash distribution, if any.

  To claim the loss, you must itemize deductions on Schedule A (Form 1040). Show the loss as a miscellaneous deduction subject to the 2%-of-adjusted-gross-income limit.

  You cannot claim a loss if you receive securities that are not worthless, even if the total value of the distribution is less than the plan participant's cost. You recognize gain or loss only when you sell or exchange the securities.

A loss under a nonqualified plan, such as a commercial variable annuity, is deductible in the same manner as a lump-sum distribution.

Capital Gain Treatment

Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. The amount treated as capital gain is taxed at a 20% rate. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.

Complete Part II of Form 4972 to choose the 20% capital gain election.

Figuring the capital gain and ordinary income parts.   Generally, figure the capital gain and ordinary income parts of a lump-sum distribution by using the following formulas.
       
Capital Gain:
  Total Taxable Amount × Months of active participation before 1974
  Total months of active participation
Ordinary Income:
  Total Taxable Amount × Months of active participation after 1973
  Total months of active participation

  In figuring the months of active participation before 1974, count as 12 months any part of a calendar year in which the plan participant actively participated under the plan. For active participation after 1973, count as one month any part of a calendar month in which the participant actively participated in the plan.

  The capital gain part should be shown in box 3 of Form 1099-R or other statement given to you by the payer of the distribution.

Reduction for federal estate tax.   If any federal estate tax (discussed under Survivors and Beneficiaries , later) was paid on the lump-sum distribution, you must decrease the capital gain by the amount of estate tax applicable to it. Follow the Form 4972 instructions for Part II, line 6, to figure the part of the estate tax applicable to the capital gain that is used to reduce the capital gain. If you do not make the capital gain election, enter on line 18 of Part III the estate tax attributable to the total lump-sum distribution. For information on how to figure the estate tax attributable to the lump-sum distribution, get the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or contact the administrator of the decedent's estate.

10-Year Tax Option

The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.

The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. You can also treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part.

Complete Part III of Form 4972 to choose the 10-year tax option. You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax.

Examples

The following examples show how to figure the separate tax on Form 4972.

Example 1.

Robert C. Smith, who was born in 1935, retired from Crabtree Corporation in 2013. He withdrew the entire amount to his credit from the company's qualified pension plan. In December 2013, he received a total distribution of $175,000 (the $25,000 tax-free part of the distribution consisting of employee contributions plus the $150,000 taxable part of the distribution consisting of employer contributions and earnings on all contributions).

The payer gave Robert a Form 1099-R, which shows the capital gain part of the taxable distribution (the part attributable to participation before 1974) to be $10,000. Robert elects 20% capital gain treatment for this part. Filled-in copies of Robert's Form 1099-R and Form 4972 follow. He enters $10,000 on Form 4972, Part II, line 6 and $2,000 ($10,000 × 20%) on Part II, line 7.

The ordinary income part of the taxable distribution is $140,000 ($150,000 – $10,000). Robert elects to figure the tax on this part using the 10-year tax option. He enters $140,000 on Form 4972, Part III, line 8. Then he completes the rest of Form 4972 and includes the tax of $24,270 in the total on line 44 of his Form 1040.

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Illustrated Form 1099-R for Robert Smith

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Page 1 of illustrated Form 4972 for Robert Smith

Example 2.

Mary Brown, who was born in 1935, sold her business in 2013. She withdrew her entire interest in the qualified profit-sharing plan she had set up as the sole proprietor.

The cash part of the distribution, $160,000, is all ordinary income and is shown on her Form 1099-R below. She chooses to figure the tax on this amount using the 10-year tax option. Mary also received an annuity contract as part of the distribution from the plan. Box 8, Form 1099-R, shows that the current actuarial value of the annuity was $10,000. She enters these figures on Form 4972 (shown later).

After completing Form 4972, she includes the tax of $28,070 in the total on Form 1040, line 44.

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Illustrated Form 1099-R for Mary Brown

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Page 1 of illustrated Form 4972 for Mary Brown

Rollovers

If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can generally defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. You do not include the amount rolled over in your income until you receive it in a distribution from the recipient plan or IRA without rolling over that distribution. (For information about rollovers from traditional IRAs, see chapter 1 of Publication 590.)

If you roll over the distribution to a traditional IRA, you cannot deduct the amount rolled over as an IRA contribution. When you later withdraw it from the IRA, you cannot use the optional methods discussed earlier under Lump-Sum Distributions to figure the tax.

Self-employed individuals are generally treated as employees for the rules on the tax treatment of distributions, including the rules for rollovers.

See Designated Roth accounts , later, for information on rollovers (including in-plan Roth rollovers) related to those accounts. Also, see Rollovers to Roth IRAs , later, for information on rollovers from a qualified retirement plan to a Roth IRA.

Qualified retirement plan.   For this purpose, the following plans are qualified retirement plans.
  • A qualified employee plan.

  • A qualified employee annuity.

  • A tax-sheltered annuity plan (403(b) plan).

  • An eligible state or local government section 457 deferred compensation plan.

Eligible rollover distribution.   An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except:
  1. Any of a series of substantially equal distributions paid at least once a year over:

    1. Your lifetime or life expectancy,

    2. The joint lives or life expectancies of you and your beneficiary, or

    3. A period of 10 years or more,

  2. A required minimum distribution (discussed later under Tax on Excess Accumulation ),

  3. Hardship distributions,

  4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to these distributions, or of excess annual additions and any allocable gains (see Corrective distributions of excess plan contributions , at the beginning of Taxation of Nonperiodic Payments, earlier),

  5. A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan (see Loans Treated as Distributions , earlier),

  6. Dividends paid on employer securities, and

  7. The cost of life insurance coverage.

  In addition, a distribution to the plan participant's beneficiary generally is not treated as an eligible rollover distribution. However, see Qualified domestic relations order (QDRO) , Rollover by surviving spouse , and Rollovers by nonspouse beneficiary , later.

Rollover of nontaxable amounts.   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA.

  If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

  Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606, Nondeductible IRAs, for the year of the distribution. For more information, see the Form 8606 instructions.

Withholding requirements.   If an eligible rollover distribution is paid to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to another qualified retirement plan or to an IRA. However, you can avoid withholding by choosing the direct rollover option, discussed later. Also, see Choosing the right option at the end of this discussion.

Exceptions.   An eligible rollover distribution is not subject to withholding to the extent it consists of net unrealized appreciation from employer securities that can be excluded from your gross income. (For a discussion of the tax treatment of a distribution of employer securities, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments, earlier.)

  In addition, withholding from an eligible rollover distribution paid to you is not required if:
  • The distribution and all previous eligible rollover distributions you received during the tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200, or

  • The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

Direct rollover option.   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA.

  There is an automatic rollover requirement for mandatory distributions. A mandatory distribution is a distribution made without your consent and before you reach age 62 or normal retirement age, whichever is later. The automatic rollover requirement applies if the distribution is more than $1,000 and is an eligible rollover distribution. You can choose to have the distribution paid directly to you or rolled over directly to your traditional or Roth IRA or another qualified retirement plan. If you do not make this choice, the plan administrator will automatically roll over the distribution into an IRA of a designated trustee or issuer.

No tax withheld.   If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. If any part of the eligible rollover distribution is paid to you, the payer must generally withhold 20% of it for income tax.

Payment to you option.   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. However, the full amount is treated as distributed to you even though you actually receive only 80%. You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA.

   If you are under age 59½ when a distribution is paid to you, you may have to pay a 10% tax (in addition to the regular income tax) on the taxable part (including any tax withheld) that you do not roll over. See Tax on Early Distributions , later.

Partial rollovers.   If you receive a lump-sum distribution, it may qualify for special tax treatment. See Lump-Sum Distributions , earlier. However, if you roll over any part of the distribution, the part you keep does not qualify for special tax treatment.

Rolling over more than amount received. If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld.

Example.

You receive an eligible rollover distribution of $10,000 from your employer's qualified employee plan. The payer withholds $2,000, so you actually receive $8,000. If you want to roll over the entire $10,000 to postpone including that amount in your income, you will have to get $2,000 from some other source to add to the $8,000 you actually received.

If you roll over only $8,000, you must include the $2,000 not rolled over in your income for the distribution year. Also, you may be subject to the 10% additional tax on the $2,000 if it was distributed to you before you reached age 59½.

Time for making rollover.   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan.

  The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Example.

In the previous example, you received the distribution on June 30. To postpone including it in your income, you must complete the rollover by August 29, the 60th day following June 30.

Frozen deposits.   If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended. An amount is a frozen deposit if you cannot withdraw it because of either:
  • The bankruptcy or insolvency of the financial institution, or

  • A restriction on withdrawals by the state in which the institution is located because of the bankruptcy or insolvency (or threat of it) of one or more financial institutions in the state.

  The 60-day rollover period is extended by the period for which the amount is a frozen deposit and does not end earlier than 10 days after the amount is no longer a frozen deposit.

Retirement bonds.   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA or qualified employer plan. Subsequent distributions of those proceeds, however, do not qualify for the 10-year tax option or capital gain treatment.

Annuity contracts.   If an annuity contract was distributed to you by a qualified retirement plan, you can roll over an amount paid under the contract that is otherwise an eligible rollover distribution. For example, you can roll over a single sum payment you receive upon surrender of the contract to the extent it is taxable and is not a required minimum distribution.

Rollovers of property.   To roll over an eligible rollover distribution of property, you must either roll over the actual property distributed or sell it and roll over the proceeds. You cannot keep the distributed property and roll over cash or other property.

  If you sell the distributed property and roll over all the proceeds, no gain or loss is recognized on the sale. The sale proceeds (including any portion representing an increase in value) are treated as part of the distribution and are not included in your gross income.

  If you roll over only part of the proceeds, you are taxed on the part you keep. You must allocate the proceeds you keep between the part representing ordinary income from the distribution (its value upon distribution) and the part representing gain or loss from the sale (its change in value from its distribution to its sale).

Example 1.

On September 4, 2013, Paul received an eligible rollover distribution from his employer's noncontributory qualified employee plan of $50,000 in nonemployer stock. On September 24, 2013, he sold the stock for $60,000. On October 3, 2013, he contributed $60,000 cash to a traditional IRA. Paul does not include either the $50,000 eligible rollover distribution or the $10,000 gain from the sale of the stock in his income. The entire $60,000 rolled over will be ordinary income when he withdraws it from his IRA.

Example 2.

The facts are the same as in Example 1, except that Paul sold the stock for $40,000 and contributed $40,000 to the IRA. Paul does not include the $50,000 eligible rollover distribution in his income and does not deduct the $10,000 loss from the sale of the stock. The $40,000 rolled over will be ordinary income when he withdraws it from his IRA.

Example 3.

The facts are the same as in Example 1, except that Paul rolled over only $45,000 of the $60,000 proceeds from the sale of the stock. The $15,000 proceeds he did not roll over includes part of the gain from the stock sale. Paul reports $2,500 ($10,000 ÷ $60,000 × $15,000) as capital gain and $12,500 ($50,000 ÷ $60,000 × $15,000) as ordinary income.

Example 4.

The facts are the same as in Example 2, except that Paul rolled over only $25,000 of the $40,000 proceeds from the sale of the stock. The $15,000 proceeds he did not roll over includes part of the loss from the stock sale. Paul reports $3,750 ($10,000 ÷ $40,000 × $15,000) capital loss and $18,750 ($50,000 ÷ $40,000 × $15,000) ordinary income.

Property and cash distributed.   If both cash and property were distributed and you did not roll over the entire distribution, you may designate what part of the rollover is allocable to the cash distribution and what part is allocable to the proceeds from the sale of the distributed property. If the distribution included an amount that is not taxable (other than the net unrealized appreciation in employer securities) as well as an eligible rollover distribution, you may also designate what part of the nontaxable amount is allocable to the cash distribution and what part is allocable to the property. Your designation must be made by the due date for filing your tax return, including extensions. You cannot change your designation after that date. If you do not make a designation on time, the rollover amount or the nontaxable amount must be allocated on a ratable basis.

Qualified domestic relations order (QDRO).   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. (See Qualified domestic relations order (QDRO) under General Information, earlier.) If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee.

Rollover by surviving spouse.   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You can roll over the distribution into a qualified retirement plan or a traditional or Roth IRA. For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later.

  A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. However, see Rollovers by nonspouse beneficiary next.

Rollovers by nonspouse beneficiary.   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590.

How to report.    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, write "Rollover" next to the line.

Written explanation to recipients.   The administrator of a qualified retirement plan must, within a reasonable period of time before making an eligible rollover distribution, provide you with a written explanation. It must tell you about all of the following.
  • Your right to have the distribution paid tax free directly to another qualified retirement plan or to a traditional or Roth IRA.

  • The requirement to withhold tax from the distribution if it is not directly rolled over.

  • The nontaxability of any part of the distribution that you roll over within 60 days after you receive the distribution.

  • Other qualified retirement plan rules that apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.

  • How the distribution rules of the plan to which you roll over the distribution may differ from the rules that apply to the plan making the distribution in their restrictions and tax consequences.

Reasonable period of time.   The plan administrator must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made. However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as the following two requirements are met.
  • You must have the opportunity to consider whether or not you want to make a direct rollover for at least 30 days after the explanation is provided.

  • The information you receive must clearly state that you have the right to have 30 days to make a decision.

Contact the plan administrator if you have any questions regarding this information.

Designated Roth accounts.   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution (see Direct rollover option , earlier) or you can roll over the entire amount (or any portion) to a Roth IRA. Also, if you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan (in-plan Roth rollover). The rollover of any untaxed amounts are included in income. See In-plan Roth rollovers below.

  A qualified distribution from a designated Roth account is not includible in income. (A qualified distribution is defined earlier in the discussion of designated Roth accounts under Taxation of Periodic Payments). Generally, you cannot have a qualified distribution within the 5-tax-year period beginning with the first tax year for which the participant made a designated Roth contribution to the plan. If a direct rollover is made from a designated Roth account under another plan or an in-plan Roth rollover is made, the 5-tax-year period of participation begins on the first day of your tax year for which you first had designated Roth contributions made to the account either making the distribution or receiving the distribution, whichever was earlier.

  If you roll over only part of an eligible rollover distribution that is not a qualified distribution and not paid as a direct rollover contribution, the part rolled over is considered to be first from the income portion of the distribution.

Example.

You receive an eligible rollover distribution that is not a qualified distribution from your designated Roth account. The distribution consists of $11,000 (investment) and $3,000 (income earned). Within 60 days of receipt, you roll over $7,000 into a Roth IRA. The $7,000 consists of $3,000 of income and $4,000 of investment. Since you rolled over the part of the distribution that could be included in gross income (income earned), none of the distribution is included in gross income.

In-plan Roth rollovers.   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over any vested amounts from those plans to a designated Roth account within the same plan. The in-plan Roth rollover must be an eligible rollover distribution (defined earlier under Eligible rollover distribution ). Any untaxed amounts included in the in-plan Roth rollover must be included in income in the year you receive the distribution.

  You can make the in-plan Roth rollover by direct transfer of the amount from the non-Roth account to your designated Roth account within the same plan. The 20% mandatory withholding does not apply to in-plan Roth rollovers made by direct rollover. You can also effect the in-plan Roth rollover by receiving an eligible rollover distribution from your 401(k), 403(b), or 457(b) plan and within 60 days deposit it into a designated Roth account in the same plan.

  Your plan must provide a written explanation of the consequences of making an in-plan Roth rollover. In-plan Roth rollovers cannot be undone. Unlike rollovers to Roth IRAs, you cannot later recharacterize an in-plan Roth rollover.

If you received employer securities as a part of your in-plan Roth rollover distribution the rollover is treated as a distribution for the purpose of net unrealized appreciation (NUA). See Distributions of employer securities, earlier.

20% Mandatory withholding.   A payor must normally withhold 20% when a rollover distribution is paid to you. However, some part of your distribution may not be subject to the mandatory 20% withholding. Otherwise nondistributable amounts are not subject to the mandatory 20% withholding. An example of otherwise nondistributable amounts are employer matching contributions in a 401(k) plan. See Payment to you option, earlier.

You cannot roll over amounts from your Traditional TSP to your Roth TSP. See Publication 721 for more details.

How to report.   Enter the total amount of the distribution before income tax or deductions were withheld on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

  
If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Rollovers to Roth IRAs.   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. In addition, the 10% tax on early distributions does not apply.

  Any amount rolled over into a Roth IRA is subject to the same rules for converting a traditional IRA into a Roth IRA. For more information, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1 of Publication 590.

How to report.   Enter the total amount of the distribution before income tax or deductions were withheld on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Choosing the right option.    Table 1 may help you decide which distribution option to choose. Carefully compare the effects of each option.

  

Table 1. Comparison of Payment to You Versus Direct Rollover

Affected item Result of a payment to you Result of a direct rollover
Withholding The payer must withhold 20% of the taxable part. There is no withholding.
Additional tax If you are under age 59½, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over. There is no 10% additional tax. See Tax on Early Distributions , later.
When to report 
as income
Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid. Any taxable part is not income to you until later distributed to you from the new plan or IRA. However, see Rollovers to Roth IRAs , earlier, for an exception.

Qualified settlement income.   If you are a qualified taxpayer and you received qualified settlement income in connection with the Exxon Valdez litigation, you can contribute all or part of it to an eligible retirement plan. This includes a qualified retirement plan. The amount contributed cannot exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your tax return, not including extensions.

  Qualified settlement income that you contribute to a qualified retirement plan will be treated as having been rolled over in a direct trustee-to-trustee transfer within 60 days of the distribution. The amount contributed is not included in your taxable income and it is not considered to be investment in the contract.

   You are a qualified taxpayer if you are:
  • A plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska), or

  • The beneficiary of the estate of a plaintiff who acquired the right to receive qualified settlement income from that plaintiff and who is the spouse or immediate relative of that plaintiff.

  Qualified settlement income is any interest or punitive damage awards which are:
  • Otherwise includible in income, and

  • Received in connection with the Exxon Valdez civil action described (whether pre- or post-judgment and whether related to a settlement or a judgment).

Qualified settlement income can be received as periodic payments or as a lump-sum. See Publication 525, Taxable and Nontaxable Income, for information on how to report Exxon Valdez settlement income.

Special rule for Roth IRAs and designated Roth accounts.    Qualified settlement income that is contributed to a Roth IRA or a designated Roth account will be:
  • Included in your taxable income for the year the qualified settlement income was received, and

  • Treated as part of your cost basis (investment in the contract) that is not taxable when distributed.

Special Additional Taxes

To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in prorated amounts over your life expectancy. These special additional taxes are the taxes on:

  • Early distributions, and

  • Excess accumulation (not receiving minimum distributions).

These taxes are discussed in the following sections.

If you must pay either of these taxes, report them on Form 5329. However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and enter “No” under the heading “Other Taxes” to the left of line 58. If you file Form 1040NR, enter 10% of the taxable part of the distribution on line 56 and enter “No” under the heading “Other Taxes” to the left of line 56.

Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040 or Form 1040NR. This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception.

Tax on Early Distributions

Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. This tax applies to the part of the distribution that you must include in gross income. It does not apply to any part of a distribution that is tax free, such as amounts that represent a return of your cost or that were rolled over to another retirement plan. It also does not apply to corrective distributions of excess deferrals, excess contributions, or excess aggregate contributions (discussed earlier under Taxation of Nonperiodic Payments ).

For this purpose, a qualified retirement plan is:

  • A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)),

  • A qualified employee annuity plan,

  • A tax-sheltered annuity plan (403(b) plan), or

  • An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA).

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 the line 3 amount by 5% instead of 10%. Attach an explanation to your return.

Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period.   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from your 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan Roth rollover that you had to include in income (recapture amount). A separate 5-year period applies to each in-plan Roth rollover. See Figuring your recapture amount , later, to determine the recapture amount, if any.

  The 5-year period used for determining whether the 10% early distribution tax applies to a distribution allocable to an in-plan Roth rollover is separately determined for each in-plan Roth rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

Figuring your recapture amount.   For any early distribution in 2013 from your designated Roth account that is allocable to an in-plan Roth rollover, you allocate the amount from your 2013 Form 1099-R, box 10, to the amounts, if any, you have rolled over into that designated Roth account.

  If you have not taken a distribution from your designated Roth account before 2013, then allocate the amount in box 10 of your 2013 Form 1099-R to the amounts you reported on the lines listed in the Recapture Allocation Chart (filling in the Taxable column first, and then the Nontaxable column for each year) until you have covered the entire amount in box 10.

  If you have taken a distribution from your designated Roth account prior to 2013, then allocate the amount in box 10 of your 2013 Form 1099-R to the amounts you reported on the lines listed in the Recapture Allocation Chart (filling in the Taxable column first, and then the Nontaxable column for each year). However, do not start at the beginning, instead begin with the first line that has not been used fully for a previous distribution begin.

  Your recapture amount is the sum of the amounts you allocated under the Taxable column in the Recapture Allocation Chart . You will also include this amount on Form 5329, line 1.

Recapture Allocation Chart

Taxable Year   Taxable     Nontaxable (Basis)    
2010   Form 8606, line 23:     Form 8606, line 22:    
2011   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*:     Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**:    
2012   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*:     Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**:    
2013   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*:     Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**:    
    Total     Total    
Note: The sum of the totals for each column should equal the amount reported on your 2013 Form 1099-R, box 10.
*Only include those amounts rolled over to a Roth IRA. 
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA.

Example.

You had an in-plan Roth rollover in 2013 of $50,000. You did not have any in-plan Roth rollovers in 2011 or 2012. Your 2013 Form 1040 includes $30,000 on line 16b, the taxable portion of the in-plan Roth rollover, and $50,000 on line 16a, the in-plan Roth rollover including $20,000 of basis.

In December of 2013, at age 57, you took a distribution of $35,000 from your designated Roth account. The 2013 Form 1099-R shows the distribution of $35,000 reported in box 1, the taxable portion of the distribution of $3,500 reported in box 2a, and the amount of $31,500 allocable to the in-plan Roth rollover reported in box 10. Since you had no in-plan Roth rollovers in 2011 or 2012, you would allocate the $31,500 reported in box 10 of Form 1099-R as shown in the Example Recapture Allocation Chart .

The recapture amount, the amount subject to tax on early distributions allocable to the in-plan Roth rollover, is $30,000 ($31,500 − $1,500). Your amount subject to tax on early distributions reported on Form 5329, line 1, for this distribution is $33,500 ($30,000 allocable to Form 1040, line 16b, and $3,500 from Form 1099-R, box 2a).

Example Recapture Allocation Chart

Taxable Year   Taxable     Nontaxable (Basis)    
2010   Form 8606, line 23:     Form 8606, line 22:    
2011   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*:     Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**:    
2012   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*:     Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**:    
2013   Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*: $30,000   Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**: $1,500  
    Total $30,000   Total $1,500  
Note: The sum of the totals for each column should equal the amount reported on your 2013 Form 1099-R, box 10.
*Only include those amounts rolled over to a Roth IRA. 
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA.
Exceptions to tax.    Certain early distributions are excepted from the early distribution tax. If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions.

  
If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Enter exception number “12” on line 2.

General exceptions.   The tax does not apply to distributions that are:
  • Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service). See Substantially equal periodic payments , later,

  • Made because you are totally and permanently disabled, or

  • Made on or after the death of the plan participant or contract holder.

Additional exceptions for qualified retirement plans.   The tax does not apply to distributions that are:
  • From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees) (see Separation from service , later),

  • From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,

  • From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (7.5% if you or your spouse were born before January 2, 1949) of your adjusted gross income, whether or not you itemize your deductions for the year,

  • From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,

  • From an employee stock ownership plan for dividends on employer securities held by the plan,

  • From a qualified retirement plan due to an IRS levy of the plan, or

  • From elective deferral accounts under 401(k) or 403(b) plans, or similar arrangements, that are qualified reservist distributions.

  • Phased retirement annuity payments made to federal employees. See Pub. 721 for more information on the phased retirement program.

Separation from service.   In order to meet the requirements for the first exception in the list above, you must have separated from service in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). You cannot separate from service before that year, wait until you are age 55 (or age 50 for qualified public safety employees), and take a distribution.

Example.

George separated from service from his employer at age 49. In the year he reached age 55 he took a distribution from his retirement plan. Because he separated from service before he reached age 55, he did not meet the requirements for the exception for a distribution made from a qualified retirement plan (other than an IRA) after separating from service in or after reaching age 55 (age 50 for qualified public safety employees).

Qualified public safety employees.   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. You are a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.

Qualified reservist distributions.   A qualified reservist distribution is not subject to the additional tax on early distributions. A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. You must be ordered or called to active duty after September 11, 2001.

  
You can choose to re-contribute part or all of the distributions to an IRA. These additional contributions must be made within 2 years after your active-duty period ends. Any amount recontributed must be reported on Form 8606 as a nondeductible contribution. You cannot take a deduction for these contributions. However, the normal dollar limitations for contributions to IRAs do not apply to these special contributions, and you can make regular contributions to your IRA, up to the amount otherwise allowable.

Additional exceptions for nonqualified annuity contracts.   The tax does not apply to distributions that are:
  • From a deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,

  • From a deferred annuity contract under a qualified personal injury settlement,

  • From a deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or

  • From an immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually).

Substantially equal periodic payments.   Payments are substantially equal periodic payments if they are made in accordance with one of the following methods.
  1. Required minimum distribution method. Under this method, the resulting annual payment is redetermined for each year.

  2. Fixed amortization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.

  3. Fixed annuitization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.

For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf.

  
A change from method (2) or (3) to method (1) is not treated as a modification to which the recapture tax (discussed next) applies.

Recapture tax for changes in distribution method under equal payment exception.   An early distribution recapture tax may apply if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.

   The recapture tax also applies after you reach age 59½ if your payments under a distribution method that qualifies for the exception are modified within 5 years of the date of the first payment. In that case, the tax applies only to payments distributed before you reach age 59½.

  Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Do not write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form.

Tax on Excess Accumulation

To 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 must begin no later than your required beginning date (defined later). The payments each year cannot be less than the minimum required distribution.

If the actual distributions to you in any year are less than the minimum required distribution (RMD) for that year, you are subject to an additional tax. The tax equals 50% of the part of the required minimum distribution that was not distributed.

For this purpose, a qualified retirement plan includes:

  • A qualified employee plan,

  • A qualified employee annuity plan,

  • An eligible section 457 deferred compensation plan, or

  • A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).

Waiver.   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. If you believe you qualify for this relief, you must file Form 5329 and attach a letter of explanation. In Part VIII of that form, enter “RC” and the amount you want waived in parentheses on the dotted line next to line 52. Subtract this amount from the total shortfall you figured without regard to the waiver and enter the result on line 52.

State insurer delinquency proceedings.   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. If your payments are reduced below the minimum because of these proceedings, you should contact your plan administrator. Under certain conditions, you will not have to pay the 50% excise tax.

Required beginning date.   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of:
  • The calendar year in which you reach age 70½, or

  • The calendar year in which you retire from employment with the employer maintaining the plan.

However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired.

  If you reach age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Your required distribution then must be made for 2014 by December 31, 2014.

5% owners.   If you are a 5% owner, you must begin to receive distributions from the plan by April 1 of the year that follows the calendar year in which you reach age 70½. This rule does not apply if your retirement plan is a government or church plan.

  You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer.

Age 70½.   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. For example, if your 70th birthday was on June 30, 2013, you reached age 70½ on December 30, 2013. If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014.

Required distributions.   By the required beginning date, you must either:
  • Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or

  • Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period).

  After the starting year for periodic distributions, you must receive at least the minimum required distribution for each year by December 31 of that year. (The starting year is the year in which you reach age 70½ or retire, whichever applies in determining your required beginning date.) If no distribution is made in your starting year, the minimum required distributions for 2 years must be made the following year (one by April 1 and one by December 31).

Example.

You retired under a qualified employee plan in 2012. You reached age 70½ on August 20, 2013. For 2013 (your starting year), you must receive a minimum amount from your retirement plan by April 1, 2014. You must receive the minimum required distribution for 2014 by December 31, 2014.

Distributions after the employee's death.   If the employee was receiving periodic distributions before his or her death, any payments not made as of the time of death must be distributed at least as rapidly as under the distribution method being used at the date of death.

  If the employee dies before the required beginning date, the entire account must be distributed under one of the following rules.
  • Rule 1. The distribution must be completed by December 31 of the fifth year following the year of the employee's death.

  • Rule 2. The distribution must be made in annual amounts over the life or life expectancy of the designated beneficiary.

  The terms of the plan may determine which of these two rules apply. If the plan permits the employee or the beneficiary to choose the rule that applies, this choice must be made by the earliest date a distribution would be required under either of the rules. Generally, this date is December 31 of the year following the year of the employee's death.

  If the employee or the beneficiary did not choose either rule and the plan does not specify the rule that applies, distribution must be made under Rule 2 if the employee has a designated beneficiary or under Rule 1 if the employee does not have a designated beneficiary.

  Distributions under Rule 2 generally must begin by December 31 of the year following the year of the employee's death. However, if the surviving spouse is the beneficiary, distributions need not begin until December 31 of the year the employee would have reached age 70½, if later.

   If the surviving spouse is the designated beneficiary and distributions are to be made under Rule 2, a special rule applies if the spouse dies after the employee but before distributions are required to begin. In this case, distributions may be made to the spouse's beneficiary under either Rule 1 or Rule 2, as though the beneficiary were the employee's beneficiary and the employee died on the spouse's date of death. However, if the surviving spouse remarries after the employee's death and the new spouse is designated as the spouse's beneficiary, this special rule applicable to surviving spouses does not apply to the new spouse.

Minimum distributions from an annuity plan.   Special rules may apply if you receive distributions from your retirement plan in the form of an annuity. Your plan administrator should be able to give you information about these rules.

Minimum distributions from an individual account plan.   Your plan administrator should be able to give you information about how the amount of your required distribution was figured.

  If there is an account balance to be distributed from your plan (not as an annuity), your plan administrator must figure the minimum amount that must be distributed from the plan each year.

What types of installments are allowed?   The minimum amount that must be distributed for any year may be made in a series of installments (for example, monthly or quarterly) as long as the total payments for the year made by the date required are not less than the minimum amount required for the year.

More than minimum.   Your plan can distribute more in any year than the minimum amount required for that year but, if it does, you will not receive credit for the additional amount in determining the minimum amount required for future years. However, any amount distributed in your starting year will be credited toward the amount required to be distributed by April 1 of the following year.

Combining multiple accounts to satisfy the minimum distribution requirements.   Generally, the required minimum distribution must be figured separately for each account. Each qualified employee retirement plan and qualified annuity plan must be considered individually in satisfying its distribution requirements. However, if you have more than one tax-sheltered annuity account, you can total the required distributions and then satisfy the requirement by taking distributions from any one (or more) of the tax-sheltered annuities.

Survivors and Beneficiaries

Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have reported it. However, some special rules apply, and they are covered elsewhere in this publication as well as in this section.

Estate tax deduction.   You may be entitled to a deduction for estate tax if you receive amounts included in your income as income in respect of a decedent under a joint and survivor annuity that was included in the decedent's estate. You can deduct the part of the total estate tax that was based on the annuity, provided that the decedent died after his or her annuity starting date. (For details, see section 1.691(d)-1 of the regulations.) Deduct it in equal amounts over your remaining life expectancy.

  If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction.

  You can take the estate tax deduction as an itemized deduction on Schedule A (Form 1040). This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction.

Survivors of employees.   Distributions the beneficiary of a deceased employee gets may be accrued salary payments; distributions from employee profit-sharing, pension, annuity, or stock bonus plans; or other items. Some of these should be treated separately for tax purposes. The treatment of these distributions depends on what they represent.

  Salary or wages paid after the death of the employee are usually the beneficiary's ordinary income. If you are a beneficiary of an employee who was covered by any of the retirement plans mentioned, you can exclude from income nonperiodic distributions received that totally relieve the payer from the obligation to pay an annuity. The amount that you can exclude is equal to the deceased employee's investment in the contract (cost).

  If you are entitled to receive a survivor annuity on the death of an employee, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. You must figure the taxable and tax-free part of each payment using the method that applies as if you were the employee. For more information, see Taxation of Periodic Payments , earlier.

Survivors of retirees.   Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income. Include them in income in the same way the retiree would have included them in gross income. See Partly Taxable Payments under Taxation of Periodic Payments, earlier.

  If the retiree reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable.

   If the retiree was reporting the annuity under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. The resulting tax-free amount will then remain fixed for the initial and future payments. Increases in the survivor annuity are fully taxable. See Publication 939 for more information on the General Rule.

   If the retiree was reporting the annuity under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. This amount remains fixed even if the annuity payments are increased or decreased. See Simplified Method under Taxation of Periodic Payments, earlier.

  

Guaranteed payments.   If you receive guaranteed payments as the decedent's beneficiary under a life annuity contract, do not include any amount in your gross income until your distributions plus the tax-free distributions received by the life annuitant equal the cost of the contract. All later distributions are fully taxable. This rule does not apply if it is possible for you to collect more than the guaranteed amount. For example, it does not apply to payments under a joint and survivor annuity.

How To Get Tax Help

Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you.

Free help with your tax return.   You can get free help preparing your return nationwide from IRS-certified volunteers. The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS.gov, download the IRS2Go app, or call 1-800-906-9887.

  As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, visit AARP's website at www.aarp.org/money/taxaide or call 1-888-227-7669. For more information on these programs, go to IRS.gov and enter “VITA” in the search box.

Internet.    IRS.gov and IRS2Go are ready when you are —24 hours a day, 7 days a week.
  • Download the free IRS2Go app from the iTunes app store or from Google Play. Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs.

  • Check the status of your 2013 refund with the Where's My Refund? application on IRS.gov or download the IRS2Go app and select the Refund Status option. The IRS issues more than 9 out of 10 refunds in less than 21 days. Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day.

  • Use the Interactive Tax Assistant (ITA) to research your tax questions. No need to wait on the phone or stand in line. The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. When you reach the response screen, you can print the entire interview and the final response for your records. New subject areas are added on a regular basis. 
    Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS.gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. You can use the IRS Tax Map, to search publications and instructions by topic or keyword. The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics.

  • Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. You can also ask the IRS to mail a return or an account transcript to you. Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS.gov or by calling 1-800-908-9946. Tax return and tax account transcripts are generally available for the current year and the past three years.

  • Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant.

  • Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS.

  • If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance.

  • Check the status of your amended return using Where's My Amended Return? Go to IRS.gov and enter Where's My Amended Return? in the search box. You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. It can take up to 3 weeks from the date you mailed it to show up in our system.

  • Make a payment using one of several safe and convenient electronic payment options available on IRS.gov. Select the Payment tab on the front page of IRS.gov for more information.

  • Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today.

  • Figure your income tax withholding with the IRS Withholding Calculator on IRS.gov. Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld.

  • Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS.gov.

  • Request an Electronic Filing PIN by going to IRS.gov and entering Electronic Filing PIN in the search box.

  • Download forms, instructions and publications, including accessible versions for people with disabilities.

  • Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS.gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. An employee can answer questions about your tax account or help you set up a payment plan. Before you visit, check the Office Locator on IRS.gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. If you have a special need, such as a disability, you can request an appointment. Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service.

  • Apply for an Employer Identification Number (EIN). Go to IRS.gov and enter Apply for an EIN in the search box.

  • Read the Internal Revenue Code, regulations, or other official guidance.

  • Read Internal Revenue Bulletins.

  • Sign up to receive local and national tax news and more by email. Just click on “subscriptions” above the search box on IRS.gov and choose from a variety of options.

   Phone. You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Download the free IRS2Go app from the iTunes app store or from Google Play.
  • Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS.gov, or download the IRS2Go app. Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Most VITA and TCE sites offer free electronic filing. Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location.

  • Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. The IRS issues more than 9 out of 10 refunds in less than 21 days. Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Note, the above information is for our automated hotline. Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return.

  • Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. It can take up to 3 weeks from the date you mailed it to show up in our system.

  • Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). You should receive your order within 10 business days.

  • Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040.

  • Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. These individuals can also contact the IRS through relay services such as the Federal Relay Service.

   Walk-in. You can find a selection of forms, publications and services — in-person.
  • Products. You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs.

  • Services. You can walk in to your local TAC for face-to-face tax help. An employee can answer questions about your tax account or help you set up a payment plan. Before visiting, use the Office Locator tool on IRS.gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided.

   Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 business days after your request is received.

Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613

 
 
The Taxpayer Advocate Service Is Here to Help You. The Taxpayer Advocate Service (TAS) is your voice at the IRS. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights.  
 
What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and:
  • Your problem is causing financial difficulties for you, your family, or your business.

  • You face (or your business is facing) an immediate threat of adverse action.

  • You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised.

 
 
If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Here's why we can help:
  • TAS is an independent organization within the IRS.

  • Our advocates know how to work with the IRS.

  • Our services are free and tailored to meet your needs.

  • We have offices in every state, the District of Columbia, and Puerto Rico.

 
 
How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at Taxpayer Advocate, or call us toll-free at 1-877-777-4778. 
 
How else does TAS help taxpayers? 
 
TAS also works to resolve large-scale, systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Visit Taxpayer Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List.


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