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Avoiding Double Taxation

In 2006 a client contributed the maximum allowable to her company's

401(k) plan. In March 2007, she received a "refund" of approximately $13,000+ from the plan administrator, since the plan was found in violation of the Highly Compensated Employee rules. Of this amount withdrawn from the plan, approximately $12,000 was her contribution and another $1,000 was earnings on her contribution.

Since it was received before April 15, 2007, the $12,000 was included as income (salaries and wages) on the 2006 tax return. She has now received a 2007 1099-R showing the entire $13,000 as taxable, but with a code "P," indicating it was taxable in 2006. When I enter this information into my tax software, it includes the entire $13,000 on the pension line as taxable in 2007. Only the earnings of $1,000 should be taxable in 2007; the $12,000 balance was reported and taxed in 2006.

What overrides do I need to enter to have this handled this correctly? Do I show $13,000 received, but only $1,000 taxable? Do I delete the 1099-R entirely? Is the $1,000 reported as pension or interest? Will an override eliminate the ability to file electronically?

Reply to
R. Pile
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Help us help you, what tax software are you using?

========================================= MODERATOR'S COMMENT: Please delete all non-essential parts of the post to which you respond.

Reply to
Allan Martin

The program is TaxAct, but I presume the answers would be the same, regardless.

>
Reply to
R. Pile

Was the 12k received during 2006, and was it included in the W-2 for

2006?

The taxable amount should 1k, right? If this seems to be the case, contact your HR person at work.

Box 2a is not always correct. Is box 2b "Taxable amount not determined" checked?

No, messing with the program does not affect your ability to efile, but it just messes with the software's logic (which is usually right). You should probably enter the taxable portion as 1k, after checking the points above.

Reply to
removeps-groups

income (salaries and wages) on the 2006 tax return.

====> No. The $13,000 was received in the form of a check in March

2007, after the 2006 W-2 was issued, with a letter explaining the situation and the tax implications. A corrected W-2 was not issued.

but with a code "P," indicating it was taxable in 2006.

your HR person at work.

====> No. But it was my understanding that the excess contributions were taxable in the year of the original contribution (2006, in this case), but any earnings produced by the excess contribution were taxable in the year they are returned to the taxpayer (2007, in this case).

show $13,000 received, but only $1,000 taxable? Do I delete the 1099-R entirely? Is the $1,000 reported as pension or interest? Will an override eliminate the ability to file electronically?

just messes with the software's logic (which is usually right). You should probably enter the taxable portion as 1k, after checking the points above.

====> Thanks.

Reply to
R. Pile

R. Pile wrote: Will an override eliminate the ability to file electronically?

just messes with the software's logic (which is usually right). You should probably enter the taxable portion as 1k, after checking the points above.

My experience with TaxAct is that overriding an item directly on the 1040 will generate a warning that the return CAN'T then be efiled. The warning recommends making changes on the supporting form(s). TaxAct technical support would probably want to be made aware of this problem so they can consider a correction or work-around.

Reply to
Paultry

In addition entering the code P from the 1099-R should not have resulted in any information flowing to the 2007 tax return. This is how my tax software behaves. All software programs are not the same.

Reply to
Allan Martin

Well, if the 12k wasn't reported in the 2006 return, then it should be reported in the 2007 return. Is Box 4 (federal tax withheld) non- zero? If not, then you may have an underpayment penalty for 2007.

Reply to
removeps-groups

If not reported already in 2006 then amended return(s) should be filed for Federal and State.

Reply to
Allan Martin

Actually, it may be necessary to file an amended return for 2006 and report the 12k in line 7 (wages). But there would likely be underpayment penalties on 12k. Seems unfair. But then again because of 12k less income in 2007 you could qualify for the stimulus check if you weren't previously qualified. I wonder if you could report the whole thing in 2007 on the basis that you're a cash basis taxpayer, but the rules suggest no as the excess deferral did happen in 2006. In the 2007 return report the 1k earnigns and any withholding in box

  1. See
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    all of page 5.Seems you should have received two 1099-R's -- one for the excessdeferral with code P (to be used on the 2006 return) and 4. See
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    all of page 5.Seems you should have received two 1099-R's -- one for the excessdeferral with code P (to be used on the 2006 return) and $0 in box 4,one for the earnings with code 8 (to be used on the 2007 return) withsome value in box 4, and there should be no IRA withdrawal penalty in2007. Regarding TaxAct, I'd recommend that when entering the 1099-Rinfo, just set box 1 and 2a to $1000. in box 4,one for the earnings with code 8 (to be used on the 2007 return) withsome value in box 4, and there should be no IRA withdrawal penalty in2007. Regarding TaxAct, I'd recommend that when entering the 1099-Rinfo, just set box 1 and 2a to 00.
Reply to
removeps-groups

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