1099 box 5 challenge

[Possi]

My new clients are challenging me on their 1099R. 

Boxes 1 and 2 (gross and taxable) are both the same. 

Box 5 has an amount in it. 

They have reduced the taxable amount of their annuities every year by that amount in Box 5. 

They have been retired 34 and 36 years and, if they had used the General Simplified Rule, would have exhausted their box 9B contributions a long time ago. 

I have brought this up before, asking if I should reduce box 2 by the amount in box 5. The bottom line is "no" and I have never reduced the taxable portion based on Box 5. 

Some of the 1099Rs coming in have already reduced box 2 by box 5, but these older people's 1099s have not. I think that is because their basis is exhausted. 

I've looked for documentation to give them but can't find anything decisive. 

WWYD? 

By the way, they have always done the returns themselves and BY HAND. 

[Margaret CPA in OH]

Maybe it's robotish, but I go with the numbers in the boxes.  I should think if the clients have an issue with the taxable amount as reported to IRS, they should take it up with the issuer of the 1099R.  YMMV

[Possi]

5 minutes ago, Margaret CPA in OH said:

Maybe it's robotish, but I go with the numbers in the boxes.  I should think if the clients have an issue with the taxable amount as reported to IRS, they should take it up with the issuer of the 1099R.  YMMV

I know. They've been doing it all along and never questioned. Of course, they have zero accountability like we have. 

The instructions, as we know, are: 

Box 5. Generally, this shows the employee’s investment in the contract (after-tax contributions), if any, recovered tax free this year; the portion that’s your basis in a designated Roth account; the part of premiums paid on commercial annuities or insurance contracts recovered tax free; the nontaxable part of a charitable gift annuity; or the investment in a life insurance contract reportable under section 6050Y. This box doesn’t show any IRA contributions. If the amount shown is your basis in a designated Roth account, the year you first made contributions to that account may be entered in box 11.

So, to me the operative words are GENERALLY and IF ANY.... 

Her question, too is "why do they even put a number in that box if it's not non-taxable?" Good question. But, it also could be any of those other items. Maybe part of the annuity is actually a roth account and has nothing to do with anything? 

[Possi]

Here's an example I found that says if the payer can determine the taxability, they do. In this case, the payer did determine that it is all taxable. 

http://www.mfprsi.org/retirees/1099-box-5/

IN MY CLIENT'S CASE, taxable portion is "unknown." 

But, like I said, the basis has been used. Is there any reason I should/should not reduce the taxable portion? 

GAAAAA I HATE THIS AND DON'T HAVE TIME FOR THIS.......

[Margaret CPA in OH]

In my opinion, and only in my opinion, the reason to NOT reduce the taxable portion is the cite you provided and lack of absolute knowledge as to the source of Box 5 amount.  I suppose YOU could contact the issuer, with client permission of course, to clarify.  I would not just take their word for it.  What is this client vs your conscience and professional opinion worth?  As I wrote, YMMV.  We each have to make some of these gray and not so gray area decisions from time to time. 

What is the actual tax difference, bottom line?  Do the inclusion  bump them into a different bracket or affect other items? 

[Possi]

9 minutes ago, Margaret CPA in OH said:

In my opinion, and only in my opinion, the reason to NOT reduce the taxable portion is the cite you provided and lack of absolute knowledge as to the source of Box 5 amount.  I suppose YOU could contact the issuer, with client permission of course, to clarify.  I would not just take their word for it.  What is this client vs your conscience and professional opinion worth?  As I wrote, YMMV.  We each have to make some of these gray and not so gray area decisions from time to time. 

What is the actual tax difference, bottom line?  Do the inclusion  bump them into a different bracket or affect other items? 

It's almost $1100 difference in total tax savings. 

[Margaret CPA in OH]

Well, you have some decisions to make and I don't envy you.  No wonder the clients are adamant about this.  Maybe getting the truth of the matter from the issuer would not be a bad idea.  Wise deciding, not good luck.

[Lion EA]

Show/send them the article that talks about using up their basis in 20-30 years, because both of them are retired more than 30 years. Have them contact their issuer and loop you into the call or provide you with a statement of how much basis they have left. If they can't prove they have any basis, I would use zero.

If they have their tax returns with Form 1099-R from about 2000, ask them to show you. You might see that at that time their Box 1 was higher than Box 2 by the amount in Box 5. If so, suggest they amend their returns for the years when Box 1 equaled Box 2.

[Possi]

3 minutes ago, Lion EA said:

Show/send them the article that talks about using up their basis in 20-30 years, because both of them are retired more than 30 years. Have them contact their issuer and loop you into the call or provide you with a statement of how much basis they have left. If they can't prove they have any basis, I would use zero.

If they have their tax returns with Form 1099-R from about 2000, ask them to show you. You might see that at that time their Box 1 was higher than Box 2 by the amount in Box 5. If so, suggest they amend their returns for the years when Box 1 equaled Box 2.

I will do that if I can't get a decisive response from OPM, the issuer. I have emailed them. 

 

[Lion EA]

I had a 1099-R like that years ago when I was at Block, and back when you could get a person on the phone. While the client was at my desk, we called the state and were told that she'd used up her basis years ago, and that it was all taxable per box 2. Someone else telling the client. Problem solved. Between government downsizing "customer" service and the pandemic, communication is slow to non-existent. Good luck.

[Possi]

1 minute ago, Lion EA said:

I had a 1099-R like that years ago when I was at Block, and back when you could get a person on the phone. While the client was at my desk, we called the state and were told that she'd used up her basis years ago, and that it was all taxable per box 2. Someone else telling the client. Problem solved. Between government downsizing "customer" service and the pandemic, communication is slow to non-existent. Good luck.

Client's argument is that box 2 is "unknown." My own sister has the same OPM 1099r exactly the same. I have never reduced her taxable because by the time I was doing her return, she had been retired a long time. Her now ex-husband was reporting ALL if it as NON TAXABLE, and it was never questioned. 

Makes a person go hmmmmmmm.......

[Lion EA]

Tell them you can calculate their taxable amount by subtracting their current basis that they must provide to you in a document from OPM. Their original letter when they started drawing those pensions probably has their total basis and the number of years to subtract it.

Like most things, if the client doesn't have a document saying otherwise, the IRS says basis is zero.

Or, send them to a free tax prep service!

[Possi]

UPDATE!! 

She must have checked on it. Called my assistant and said I could stop researching.... it's insurance. 

But, I will still follow up with OPM and ask about it. Not theirs specifically, but generally. 

ugh. Such a time sucker. 

Thanks, y'all. I really love y'all. 

[Margaret CPA in OH]

Just to clarify - if Box 5 is insurance, is the Box 3 amount taxable as it says and not reduced as client said originally - or am I missing something here (not unlikely)?

[Possi]

1 hour ago, Margaret CPA in OH said:

Just to clarify - if Box 5 is insurance, is the Box 3 amount taxable as it says and not reduced as client said originally - or am I missing something here (not unlikely)?

Her box 2 taxable was "unknown."

[Hahn1040]

For OPM retirement, the date of retirement is critical in determining the method for the exclusion.  It has changed several times over the years.

Box 5 reports the insurance payment.  Sometimes this will include the Medicare payment.  IF they don't receive Social Security, some pay the medicare through the OPM retirement

Box 9b is the employee contribution

Pub 721 shows the various time frames

3-Year Rule

If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the 3-Year Rule. Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. After your cost was recovered, all payments became fully taxable. You can't use another rule to again exclude amounts from income.

The 3-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.

There is a time frame that one can continue to take the exclusion even after all of the contribution has been recovered

[peggysioux5]

From Pub 721: 

If your annuity starting date is before 1987, you can continue to take your monthly exclusion figured under the General Rule or Simplified Method for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take that same exclusion. The total exclusion may be more than your cost.

Peggy Sioux

[Possi]

1 hour ago, Hahn1040 said:

For OPM retirement, the date of retirement is critical in determining the method for the exclusion.  It has changed several times over the years.

Box 5 reports the insurance payment.  Sometimes this will include the Medicare payment.  IF they don't receive Social Security, some pay the medicare through the OPM retirement

Box 9b is the employee contribution

Pub 721 shows the various time frames

3-Year Rule

If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the 3-Year Rule. Under this rule, you excluded all the annuity payments from income until you fully recovered your cost. After your cost was recovered, all payments became fully taxable. You can't use another rule to again exclude amounts from income.

The 3-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.

There is a time frame that one can continue to take the exclusion even after all of the contribution has been recovered

That's the winning response! She said it was "insurance" and the do not get social security, so you are exactly right. They have ALL ALONG excluded this from their taxable income and have never been questioned. That's what gets my goat. Oh well, step into a new world where we comply. 

 

Thanks, Hahn1040

[joanmcq]

I have one of these and luckily I started doing their taxes shortly after he retired, so I’m using the simplified method. It reduces the taxable amount slightly each year. If they were reducing the taxable amount by the full amount....jeez that’s wrong!  I’m glad that OPM is now calculating the taxable amount.