How to handle deceased Federal retiree 1099-R, Line 5?

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swampwiz
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How to handle deceased Federal retiree 1099-R, Line 5?

Post by swampwiz »

I'll be doing (or at least advising - IANA Accountant) the taxes for someone receiving a Federal pension who has deceased. Each year, there is an amount on the 1099-R Line 5 that is about the same every year, and about 1/4 of this amount has been made considered non-taxed on his form (he has made written notes to this effect). The taxable amount on the 1099-R form has always been "UNKNOWN" for prior years. There is also a note in the deceased's tax records that the "full amount" should be non-taxed in the year of death. Of course, talking to OPM (i.e., the office of Personnel Management) to find out what will be on Line 5 is like talking to a brick wall, so I figure that I should simply presume that this Line 5 amount will continue to be about the same (i.e., to be proactive in figuring out how much to pay in estimate taxes), and when the time comes to do the taxes, formally use this Line 5 amount as the non-taxable amount.

Any ideas?
Last edited by swampwiz on Wed Sep 15, 2021 5:13 pm, edited 1 time in total.
rooms222
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Re: How to handle deceased Federal retiree 1099-5, Line 5?

Post by rooms222 »

I think if there is anything left, it is a deduction of unrecovered cost, and you get to deduct all of the already taxed contributions that had not yet been paid out. See more here: https://www.irs.gov/publications/p721

i.e. it may be much larger if he had not used up all the previously taxed money.
secondcor521
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Re: How to handle deceased Federal retiree 1099-5, Line 5?

Post by secondcor521 »

Here's a calculator that might help. It's for 2020 but there should be a 2021 version published at the same location later this year. I doubt there is much change between the 2020 and 2021 version. It's easy to use, but you do need to know the pension start date, which is usually info that the decedent or their tax folks or decedent's spouse might know. Or you might need to call OPM on that, not sure.

https://cotaxaide.org/tools/Annuity%20Calculator.html

If you're lucky, there's already a schedule that has the information on it in the decedent's prior year tax records. If so, you can compare the output of the above tool with the paperwork and make sure it matches. If not, you can at least compare the output of the above tool with the decedent's prior tax returns (although this assumes that the prior year returns were prepared correctly).

It looks like any unrecovered deductions can be put on Schedule A under Other deductions. Which may or may not help on decedent's taxes.

It would not surprise me if the 1099-R from OPM would just have the 2021 deductions, or maybe just a prorated amount.
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swampwiz
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Re: How to handle deceased Federal retiree 1099-5, Line 5?

Post by swampwiz »

secondcor521 wrote: Wed Sep 15, 2021 1:46 am Here's a calculator that might help. It's for 2020 but there should be a 2021 version published at the same location later this year. I doubt there is much change between the 2020 and 2021 version. It's easy to use, but you do need to know the pension start date, which is usually info that the decedent or their tax folks or decedent's spouse might know. Or you might need to call OPM on that, not sure.

https://cotaxaide.org/tools/Annuity%20Calculator.html

If you're lucky, there's already a schedule that has the information on it in the decedent's prior year tax records. If so, you can compare the output of the above tool with the paperwork and make sure it matches. If not, you can at least compare the output of the above tool with the decedent's prior tax returns (although this assumes that the prior year returns were prepared correctly).

It looks like any unrecovered deductions can be put on Schedule A under Other deductions. Which may or may not help on decedent's taxes.

It would not surprise me if the 1099-R from OPM would just have the 2021 deductions, or maybe just a prorated amount.
Talking to OPM is like talking to a brick wall. I think I'm just going to follow the deceased's note about using the Line 5 figure completely as non-taxed. If the IRS audits, then the IRS's accountant can do the heavy lifting and inform the spouse about how to do this going forward - and the spouse could use the unknown spouse's exclusion (or whatever it's called) to get released from penalties. And it would seem that if the IRS knew enough about this situation to know how to figure this accurately, why couldn't OPM do it as well? :oops:

The deceased's spouse is getting a survivor pension; I wonder if this complication is something she will need to be concerned about, or if this will be it for this ridiculous situation.
Last edited by swampwiz on Wed Sep 15, 2021 5:26 pm, edited 2 times in total.
Topic Author
swampwiz
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Re: How to handle deceased Federal retiree 1099-5, Line 5?

Post by swampwiz »

secondcor521 wrote: Wed Sep 15, 2021 1:46 am It looks like any unrecovered deductions can be put on Schedule A under Other deductions. Which may or may not help on decedent's taxes.

It would not surprise me if the 1099-R from OPM would just have the 2021 deductions, or maybe just a prorated amount.
The deceased had simply been taking that amount out in the form of listing the taxable part of the pension as being that much less.
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swampwiz
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Re: How to handle deceased Federal retiree 1099-5, Line 5?

Post by swampwiz »

rooms222 wrote: Tue Sep 14, 2021 2:18 pm I think if there is anything left, it is a deduction of unrecovered cost, and you get to deduct all of the already taxed contributions that had not yet been paid out. See more here: https://www.irs.gov/publications/p721

i.e. it may be much larger if he had not used up all the previously taxed money.
There has been a Line 5 amount for every year's 1099-R, so I'm just going to use that.

Do you know what page in Publication 721 states this?
Chip
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Re: How to handle deceased Federal retiree 1099-R, Line 5?

Post by Chip »

This is the relevant quote from Pub 721:

IRS Pub 721 wrote:Deduction of unrecovered cost.

If your annuity starting date is after July 1, 1986, and the cost of your annuity hasn't been fully recovered at your (or the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. The deduction is claimed on your (or your survivor's) final tax return as an "Other Itemized Deduction." If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death.

My interpretation of the quote is that you cannot do what the decedent suggested. I believe you should claim the "normal" annual exclusion amount (if allowed; see below) when figuring the taxable amount of the 1099-R. The remaining unclaimed portion of the decedent's cost would be an itemized deduction claimed on Line 16 of Schedule A.

I agree with secondcor521's suggestion to use the cotaxaide tool. I suspect the decedent started their pension before 11/19/96, as annuitants who started after that date were required to use the Simplified General Rule (SGR) and their 1099-Rs typically don't have the "Unknown" amount. Since the decedent has been excluding the same amount each year it is almost certain they are also using the SGR. You will need to know the start date of the pension and the decedent's total contributions to determine how much of the original cost has been recovered over the years. Once you have those two numbers you'll know the balance to be entered on Schedule A.

After writing the above I did some fooling around with the cotaxaide calculator. If my assumption about the pension start date being before 11/96 is correct, it is quite possible that all of the decedent's contributions have been recovered. It appears the maximum exclusion period using the SGR is 25 years. This means that annual exclusions possibly could have ended before 2021. If that's the case there is no annual exclusion allowed and there is nothing to enter on Schedule A. It's also possible that the exclusion shouldn't have been claimed in some prior years.
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swampwiz
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Re: How to handle deceased Federal retiree 1099-R, Line 5?

Post by swampwiz »

Chip wrote: Thu Sep 16, 2021 5:54 am This is the relevant quote from Pub 721:

IRS Pub 721 wrote:Deduction of unrecovered cost.

If your annuity starting date is after July 1, 1986, and the cost of your annuity hasn't been fully recovered at your (or the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. The deduction is claimed on your (or your survivor's) final tax return as an "Other Itemized Deduction." If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death.

My interpretation of the quote is that you cannot do what the decedent suggested. I believe you should claim the "normal" annual exclusion amount (if allowed; see below) when figuring the taxable amount of the 1099-R. The remaining unclaimed portion of the decedent's cost would be an itemized deduction claimed on Line 16 of Schedule A.

I agree with secondcor521's suggestion to use the cotaxaide tool. I suspect the decedent started their pension before 11/19/96, as annuitants who started after that date were required to use the Simplified General Rule (SGR) and their 1099-Rs typically don't have the "Unknown" amount. Since the decedent has been excluding the same amount each year it is almost certain they are also using the SGR. You will need to know the start date of the pension and the decedent's total contributions to determine how much of the original cost has been recovered over the years. Once you have those two numbers you'll know the balance to be entered on Schedule A.

After writing the above I did some fooling around with the cotaxaide calculator. If my assumption about the pension start date being before 11/96 is correct, it is quite possible that all of the decedent's contributions have been recovered. It appears the maximum exclusion period using the SGR is 25 years. This means that annual exclusions possibly could have ended before 2021. If that's the case there is no annual exclusion allowed and there is nothing to enter on Schedule A. It's also possible that the exclusion shouldn't have been claimed in some prior years.
Yes, it is pre-1996. Who is to say whether the "deduction" is meant to be against income directly (e.g., like a TIRA contribution) or a itemized deduction? And also what about the Line 5 amount? If the 25 years were up, wouldn't this be listed as 0? Oh well, worst comes to worst, there is a 5% penalty (and interest) for an obviously non-fraudulent mistake from a cryptic system.

This brings up an interesting question. If the deceased's return is audited, who pays the IRS if there is a judgment? :confused
secondcor521
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Re: How to handle deceased Federal retiree 1099-R, Line 5?

Post by secondcor521 »

swampwiz wrote: Thu Sep 16, 2021 10:23 pm Who is to say whether the "deduction" is meant to be against income directly (e.g., like a TIRA contribution) or a itemized deduction? And also what about the Line 5 amount? If the 25 years were up, wouldn't this be listed as 0? Oh well, worst comes to worst, there is a 5% penalty (and interest) for an obviously non-fraudulent mistake from a cryptic system.

This brings up an interesting question. If the deceased's return is audited, who pays the IRS if there is a judgment? :confused
The IRS says, when it implements rules based on laws by Congress, who are elected by us.

The basic idea is this: the decedent contributed whatever box 5 amount towards their pension, so when they get their pension back, they get to subtract their contributions from their taxable amount - they're just getting some of their own money back. There is a rule that creates a schedule, and the decedent gets to subtract that amount every year from the pension. If they die before using it all up, then the excess becomes a schedule A itemized deduction.

OPM just puts the total amount of the employee's contributions in box 5 - I think it's the same amount every year. It's not their job to figure out the schedule; it's up to the decedent / employee and/or their tax advisor, who can figure it out given the basic information we've already told you.

As for your last question, I'm not sure but I'd have to imagine that the estate of the deceased would be liable for any judgment. And I would imagine that an IRS judgment would supercede the beneficiaries receipt of any estate assets.
Chip
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Re: How to handle deceased Federal retiree 1099-R, Line 5?

Post by Chip »

swampwiz wrote: Thu Sep 16, 2021 10:23 pm Yes, it is pre-1996. Who is to say whether the "deduction" is meant to be against income directly (e.g., like a TIRA contribution) or a itemized deduction? And also what about the Line 5 amount? If the 25 years were up, wouldn't this be listed as 0? Oh well, worst comes to worst, there is a 5% penalty (and interest) for an obviously non-fraudulent mistake from a cryptic system.

This brings up an interesting question. If the deceased's return is audited, who pays the IRS if there is a judgment? :confused
These questions have been answered by secondcor521 and I agree with every answer, with the exception of the interpretation of the Line 5 amount. Even though Box 5 is labeled "Employee Contributions/Roth contributions or Health Insurance Premiums", as far as I know, for federal retirees, Line 5 is always health insurance premiums deducted from the pension. These premiums could potentially be deducted each year as a medical expense on Schedule A. Line 5 has no effect on the amount of exclusion claimed.

The Line 9 amount allows tax preparers like me (I'm a TaxAide volunteer and I'm guessing secondcor521 is as well) to recreate the schedule of annual pension exclusions when necessary. Your taxpayer (TP), since they began their pension before 11/1996, had the choice of using the General Rule (GR) or the Simplified General Rule (SGR) to calculate the annual exclusion. OPM and the IRS don't know which method they chose; it's a TP choice that isn't documented with either agency. That's why UNKNOWN appears on the 1099-R for the taxable amount (Box 2a).

Since you appear to know the date the taxpayer started their pension it should be fairly easy to determine whether or not they have fully recovered their contributions, given the 25 year maximum recovery period. It seems like you also know their age when they started the pension. If that's the case, you can look at the SGR worksheet in Pub 575 to determine the actual correct recovery period. Pay particular attention to Table 1 used in Line 3 of the worksheet. You can also calculate the exclusion period your TP was using by dividing the Line 9 amount on the 1099-R by the exclusion amount used in prior years. For example, if the Line 9 amount is 48,000 and the TP has been excluding 2,400 per year, the TP was using a 20 year recovery period (48,000/2,400 = 20).

Doing all of this will tell you the correct actions to take this year and also tell you if returns were prepared incorrectly in the past. If you have been using Line 5 as the exclusion amount those prior returns are likely incorrect.

Edit: Changed Line 5 references to Line 9. Clarified Line 5 purpose.
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Re: How to handle deceased Federal retiree 1099-R, Line 5?

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Re: How to handle deceased Federal retiree 1099-R, Line 5?

Post by jebmke »

secondcor521 wrote: Thu Sep 16, 2021 11:14 pm OPM just puts the total amount of the employee's contributions in box 5
I believe Total Contributions are put in Box 9 on the 1099-R. Very often Box 5 is for Health Insurance and I believe that is treated differently. I have seen some 1099-Rs where the difference between Box 1 and Box 2a is exactly the amount in Box 5 implying that the amount in Box 5 has already been deducted when calculating taxable income.
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