Q: I received a lump-sum Social Security benefit. It covered several prior years; how can I report that to the IRS?
A: Generally, you use your current-year income to figure the taxable part of the total benefits received in that year. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.
Under the lump-sum election method, you refigure the taxable part of all your benefits for the earlier year (including the lump-sum payment) using that year's income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for the current year (figured without the lump-sum payment for the earlier year). See IRS Publication 915 for work sheets and more information on this method.
Q: I started receiving Social Security this year. My only other income is from my company retirement and some interest. I pay federal taxes on this income. Will I have to pay any taxes on the income I receive from Social Security?
A: Some of your Social Security benefits may be taxed. It all depends on your other income and filing status. Social Security only becomes taxable when half of your benefits are added to other gross income and that total exceeds an amount determined by your filing status. For example, the amount for married filing jointly is $32,000, and for single taxpayers it is $25,000. Use the Social Security work sheet in your tax booklet to calculate the taxable amount, if any.
Q: Are my company pension benefits taxable?
A: Most pensions are fully taxable. Some are partially taxable if you had a cost basis in the pension. In a few unique situations, pensions may be tax-free. This is especially the case when they come from the Veterans Administration and when they involve disability payments for public safety officers and firefighters.
You should receive a Form 1099-R from the pension-plan administrator. It usually tells you how much of the payment is taxable. See the instructions for IRS Form 1040 or 1040A, and also see IRS Publication 575, Pensions and Annuities, for more information.
Q: Can you withdraw funds from a pension before age 59 1/2 and avoid the early withdrawal penalty?
A: Yes, there are exceptions to the early withdrawal penalty for qualified retirement pension plans. Here are four exceptions:
The 10 percent additional 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.
- Made because you are totally and permanently disabled.
- Made on or after the death of the plan participant or contract holder.
- Made from a qualified retirement pension plan after your separation from service in or after the year you reached age 55.
You can find all the exceptions starting on page 28 of IRS Publication 575.
Q: Are there any tax consequences if you roll over your 401(k) into an IRA?
A: Tax-free rollovers from a qualified retirement plan to a traditional IRA can be accomplished two ways. The best solution is to arrange for a trustee-to-trustee transfer. In this manner, no amount will be withheld for income taxes and there is no tax liability. The next method is for you to receive a check for the amount to be rolled over and for you to deposit the gross amount of the distribution (the amount before tax withholding) into a traditional IRA. If you only roll over the net amount of the check after withheld taxes, then you will have taxable income for the amount withheld for taxes. Also, you must complete the rollover within 60 days or the total distribution may be taxable.
If the retiree is past age 70 1/2 and must take a minimum required distribution from the plan, the minimum distribution cannot be rolled over. You must first have the retirement plan issue the distribution and then have the plan administrator transfer the balance to your IRA account.
Through the AARP Foundation Tax-Aide program, AARP Foundation is providing online tax counseling as a public service, and cannot guarantee the accuracy of the information provided. Your taxes are your responsibility. You are solely responsible for what you do in your own tax situation.
The AARP Foundation Tax-Aide Program is a volunteer-run, free tax-preparation and assistance service offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.