Doing the taxes…

L1: Doing the taxes…Wife and I decided to do our taxes by PC this year instead of doing it manually. We are using theTax Cut softwareprogram, which we had used a few years ago but got away from doing because wife likes to shuffle paper rather than screens.
Wife retired as a school district admin in 2001 after 30 years of service and receives a monthly pension fromWA state. She was 51 years old at that time and is 57 now.
The tax software spit out a form 5329 for her pension payments with no extra 10% due. Her 1099-R from the state pension system uses a distribution code of “2” in box 7. She has never file a form 5329 before. Is this code appropriate to a pension? Is her state pension actually a SEPP? Does she need to file a form 5329 since she has a 1099-R distribution code of “2”?
It also spit out a 5329 for me but that is appropriate since my 1099-R shows a code of “1” in box 7 and I need to claim the 72t 10% early withdrawal penalty exception. I have a SEPP and have had since 3/15/2005.
Any comments on this would be welcome.
Ed2007-04-08 15:27, By: Ed_B, IP: [67.170.159.37]

L2: Doing the taxes…Yes, her state pension is considered substantially equal payments over her life expectancy, and a 2 code is correct. No 5329 is necessary for her, since there is no need to change the 1099R coding. If you can”t get rid of the form, no harm done in letting it go through showing the 02 exception code, essentially agreeing with the 1099R.
As you indicated, you WILL need the 5329 to indicate the 1 code as incorrect, and the 02 exception for the SEPP as applicable.
2007-04-12 19:57, By: Alan S., IP: [24.116.66.98]

L2: Doing the taxes…Thanks for the reply, Alan. That was pretty much what we figured. Since the program spit out a 5329 for her, we included it in our tax forms, figuring that if it wasn”t needed there would be no problem with filing it. It is was needed, then it would be good to include it.
Ed2007-04-12 20:06, By: Ed_B, IP: [67.170.159.37]

L2: Doing the taxes…I have a similar question about pension distributions and how the programs handle things. Since I normally complete my taxes by the October, 15th deadline, I”m really shocking my wife that I”mas farahead this year than normal. I have used Turbo Tax for years and find it a much “smarter and easier” program than Tax Cut. Don”t like their price but I guess you get what you pay for. Here”s my question and it”s directed to retired military who use one of these programs, especially Turbo Tax.
In the past I have loaded my 1099-R data and the program just went along quite happily. But this year after loading the data, which included the normal Block 7, Distribution Code of 7, the program started asking me if any of the distributions were prior to age 59 1/2. At this point I “lied” and said no, but the program seemed to want to generate a Form 5329. I”ll have to revisit this section shortly to see exactly what happens, but if anyone is in a similar situation and has already worked through this issue, I would appreciate your comments.
Jim2007-04-13 07:36, By: Jim, IP: [24.252.195.14]

L2: Doing the taxes…Jim:
I can”t answer your question but I do have 2 comments to make. First, years of familiarity with ANY software program will make it “easier”. That said, neither my wife nor myself had any trouble whatsoever running the 2006 version of Tax Cut. We found it to be very straightforward and not at all a challenge. The version that we got handled everything that our 13 page return required yet cost only $15. According to the program features on the back of the software boxes, the equivalent TT program would have cost us $64. TT is a good program but I question whether it is more than 4x as good as Tax Cut. Second, I”m reminded of the old computer programmer”s phrase of “garbage in, garbage out”. When you lie to one of these programs, the results may well be trash. I strongly suggest that if you want the best that these programs can deliver, tell it the absolute truth about your tax situation and see what it delivers. If you don”t believe that those results are accurate, you can always try fiddling with the progam input later. I have to admit that I was tempted to do the same when it looked as if Tax Cut would handle my 1099-R based solely upon my IRA custodian”s idea of how it should be coded in box 7. I told it the truth, though, and on a later page was an opportunity to input my request for the 72t exception which it did accept and handle correctly.
Regards,
Ed2007-04-13 15:22, By: Ed_B, IP: [67.170.159.37]

L2: Doing the taxes…I”ve had the opportunity to use both TurboTax and TaxCut this year. I found both very similar so far with respect to the interview and navigating around. TurboTax did a better job of supporting one area (handling additional state tax refunds for 3 years back as a result of doing amended returns for those years) and both programs have an identical problem with a K-1 I”ve got (entries are in the non-passive column and they should be passive – anyone else have this problem that can clue me in to a solution?) I like the pdf output from TurboTax (maybe that is part of the cost difference????) All in all they are very similar.2007-04-13 17:10, By: John, IP: [71.208.231.221]

L2: Doing the taxes…Thanks for the input, John. It”s good to hear from someone who has had the chance to use both programs. Living in Washington state has its advantages… no state income tax for one, so I did not know about TT”s better handling of state taxes and amended returns. I also do not need to file a form 1041, so that eliminates the other problem you discovered. The PDF output is definitely a plus but the Tax Cut printouts also look real good; pretty much the same as the IRS forms, only filled in! 😉
I will definitely keep TT in mind, though, should I move to a state that does have an income tax. Can”t visualize that but, hey… one never knows what the future holds.
Ed2007-04-13 20:25, By: Ed_B, IP: [67.170.159.37]

L2: Doing the taxes…Ed and all,
Well, I went back to the program and answered the questions correctly and to my surprise, it worked out just fine. Each time I would answer a question the next question seemed to be leading me into a SEPP scenario, which of course doesn”t apply. I guess the “Code 7″ in Block 7 made all OK in the end. In previous years when entering the data all was quite straight forward and the program didn”t bring up the any similar questions that were coming up this year. Anyway, all is good. I hit 60 in 2007 but have been receiving military retired pay since age 45 and I never received anything that seemed to direct me toward this being a SEPP distribution.
As to which program to use, go with the one you like,and you probably should be consistend from year to year since both programs keep track of such things as IRA contributions and conversions, charitable contribution carryover, etc. The thing I found really great about Turbo Tax this year is the progress summary as you work through the program. As you complete one section it gives you a summary of all elements visited and compares it to last year, and it has an easy method to “Revisit” sections at any time. Don”t know if Tax Cut has anything like this but if it does it would be great. I have found that buying a new copy of Turbo Tax at Sam”s club or other discount store is preferential to signing up for their “annual renewal” program. The annual renewal is more expensive and they send you a bunch of unrelated programs that I don”t want as a “sweetner” to intice signing up. This saves me about $25over annual renewal,and I don”t care if they have new registrations for me every year.
Ed, I”m not sure about your comment about having to file Form 1041, but I think you were tying it to the K-1 comment. Receiving a K-1 does not automatically require filling Form 1041. Form K-1 reports a whole host of things. Limited Partnerships, Tax Credit programs and Estate Distributions are some items and when an individual receives a K-1 for these things, it simply flows into the Individual Form 1040. In years past both programs didn”t handle K-1”s very well, but in recent years I have found the data flowed into the programs quite nicely. I”m surprised to learn that they still have some problems. Be sure to send feedback to the programmers and they will address the situation.
In years past when working the section on IRA”s and other such plans, I had a problem with the wording of their question. They would always ask, “Did you have an IRA last year?” Now what do you think they meant by this? If you have ever opened an IRA and if you still have it, then of course the answer to their question, “Did you have an IRA last year?” is “yes.” They were really asking, “Did you open an new IRA or did you add to an existing IRA last year?” I sent them feedback on this subject and the program was changed the next time I used it. Of course I don”t think I was the only person offering this feedback, but I think they got a slew of folks commenting on the subject. Anyway, this is one example of the programmers listening to feedback from the field.
Jim2007-04-14 06:41, By: Jim, IP: [24.252.195.14]

L2: Doing the taxes…RE: using a tax program consistently from year to year
I have used Taxcut for the last several years and this year I also did got TurboTax to doublecheck some issues. When I started TurboTax I had it import my 2005 return from TaxCut and it correctly carried forward a long term capital loss I”m dealing with so it appears there is compatiblity between the programs in thsi respect.
RE: feedback to programers
How do you get feedback to these companies. The last time I tried to give some feedback that I thought was a problem with the application they replied “we can”t give tax advice”.2007-04-14 09:11, By: John, IP: [71.208.231.221]

L2: Doing the taxes…Jim:
Glad to hear that the program handled your tax situation appropriately. Doing our taxes can be frustrating enough without adding extra anxiety to them.
The progress summary would indeed be a useful feature. To tell the truth, I was not paying attention to such things as we did the taxes. Could be that there was a tab to click on that would have brought forth a summary but I didn”t notice it. I just wanted to get done ASAP! 😉
Buying any of the tax software programs at discount stores is usually a good deal. Some computer / electronics stores often have deals where they will toss in a copy if you buy some particular piece of computer hardware. If you need and were going to buy the hardware anyway, it is a great deal.
Sorry about the lack of clarity on K-1 and 1041. I file neither of these so looked them up on line. Form 1041 seemed to refer to schedule K-1 quite a lot, so I assumed a relationship between them that apparently does not exist. I appreciate your clarification of the issue.
I agree that wording can make a LARGE difference in how we proceed with any task. My biggest problem with doing the taxes is that I can see several possible meanings to most of the questions asked on the various tax forms and do not know which one is the one they really mean. Your example of the IRA question is a perfect example of someone asking the wrong question.
John:
Compatibility between programs is a great idea but is not always implemented. Glad to hear that the tax software programs have it together in this area.
The best way that I have found to give feedback to most software companies is via their web sites. Not that most of them respond to such comments but at least the mechanism for sending them in is there. I once did this concerning a graphics manipulation program I had bought. It was a good program but had a couple of problems that I thought should have been fixed. One rep said “those are features” while another said “that”s the way the program works”. Well, no duh… it works that way and it is annoying so at least consider fixing it. That did not happen, so I no longer use that program.
Ed2007-04-14 13:07, By: Ed_B, IP: [67.170.159.37]

L2: Doing the taxes…John, Ed and others,
I switched from TubroTax to Tax Cut manyyears ago, because Tax Cut was the only one at the time to offer passwords on the tax files you created, and I didn”t think my teenage son needed to know how much his dad was making. I used the professional version this year, (about $30 bucks at Staples as I recall) and it generated my very longFed Tax return, 1040, A, B, C, D, D1, E, 4562”s, 5695, 8801, and others. At the end it asked if I wanted a PDF backup, which was a pleasant surprise. Inow have a 131 page file of Fed and State with all the worksheets. KEN
2007-04-14 18:01, By: Ken, IP: [151.199.18.84]