1099R question

[rntax]

Client is a NYC Police Officer. He took a LOAN from his qualified pension plan of $50k and used the proceeds for the purchase of a new home. He received 1099R with $50K as taxable income and code 1.

As per IRC 72 (p)(2)B(ii) he can defer the taxes on the distribution, so the amount would not be taxable now. I input the 1099R and of course the amount goes to 1040 but I can't figure out how to elimenate it from there. Do I override it and attach an explanation? And if so can the return be efiled with the explanation?

Any help would be greatly appreciated. Thanks

[Catherine]

Client is a NYC Police Officer. He took a LOAN from his qualified pension plan of $50k and used the proceeds for the purchase of a new home. He received 1099R with $50K as taxable income and code 1.

As per IRC 72 (p)(2)B(ii) he can defer the taxes on the distribution, so the amount would not be taxable now. I input the 1099R and of course the amount goes to 1040 but I can't figure out how to elimenate it from there. Do I override it and attach an explanation? And if so can the return be efiled with the explanation?

Any help would be greatly appreciated. Thanks

My first guess would be to back it out on Line 21.

[rntax]

Thanks Catherine, I'll enter the IRC code and back out the 50k on the other income line.

Thanks again.

[jainen]

>>My first guess would be to back it out on Line 21<<

My first guess would be that for some reason the plan is NOT treating this as a loan. In my opinion that contradicts what the taxpayer claims, so you should reconcile the matter. Has he, for example, failed to make timely payments, or violated other terms of the loan or the plan? My second guess is that he has.

[rntax]

According to info from the NYC pension site, they are required to issue a 1099 when the term of repayment is greater than 5 years(which of course this is). However there is an exception to taxibility if the proceeds are used to purchase a home.

From NYC Police Pension Fund website:

Principal Residence Exception

Internal Revenue Code 72 (p) (2) ( (ii) provides an exception to the five-year rule mentioned in “Loan Taxability” above if you use the loan to purchase a principal residence. If you can demonstrate that your loan falls within this exception, the IRS will allow you to defer the tax payable on the loan. PPF is required by law to send you IRS Form 1099-R for this loan.

I know he hasn't defaulted on the loan because it was taken out in November and the payments are taken right out of his paycheck.

With this in mind I can't think of any other way to make the 50k non taxable on the return.

[jainen]

>>I can't think of any other way to make the 50k non taxable on the return<<

Why not do what the IRS expects? According to the instructions to Form 1040, "Enter the total distribution on line 16a and the taxable part on line 16b."

[rntax]

Would the IRS question as to why box 2a on 1099R shows 50k as taxable amount and 1040 does not have any amount as taxable? Should there be an explanation submitted somewhere?