Need Help with Tax Return After Breaking SEPP

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L1: Need Help with Tax Return After Breaking SEPPI’m looking for a source of information to help me determine how to report a broken SEPP on this year’s tax return. Isurrendered an annuity that had a 72t in progress. I know that I need to pay the penalty and tax on the amount taken out this year, but how do I report that there are two previous years’ distributions on which I paid tax, but will owe a penalty and interest? Any guidance as to where to look would be appreciated. It seems that many tax people are not familiar with the 72t rules. 2008-11-06 11:58, By: debrah107, IP: []
L2: Need Help with Tax Return After Breaking SEPPOn the Discusssion Forum home page, in the lower left corner, click on “72-T/SEPP PROFESSIONAL ADVICE” to get the address and phone # of Wm. Stecker, CPA who is the developer of this website.2008-11-06 12:40, By: dlzallestaxes, IP: []

L2: Need Help with Tax Return After Breaking SEPPDLZ… Minor point of correction – Bill is a frequent visitor and poster on the website. However, it is not his website nor is he responsible for any information (except his articles) thatare contained on this website.With that said, I do agree, that a good place to start would be to contact Bill or a competent accountant. The insurance company will be sending a 1099 for the current year. You will also want ot become familiar with form 5329 – The IRS will calculate any interest owed on teh penalty.2008-11-06 12:56, By: gfw, IP: []

L2: Need Help with Tax Return After Breaking SEPPGFW — Thanks for the correction.FYI — MOST CPAs and tax “specialists” know almost nothing about SEPP 72-T, and do not even know about this site, or Bill’s book, where they could become better informed. When I include info about SEPP 72-T in my presentations to fellow CPAs about this area, I see their expression ” what in the h…. is he talking about” and “I don’t need to know about this because it will never affect my clients”, etc.Taxpayers have to find the unique tax practitioner who does know about the tax nuances of this area. There are many “competent” tax advisors, but few who understand this area. I’m not sure if most tax software is properly programmed to handle “busted” plans with basic input, or if you must be knowledgeable in order to figure out how the info for the penalty on the prior years’ cumulative distribution must be input in the year of the “busting”, or if you have to go back and amend all prior years. ( If the latter, that might cause a real problem since tax returns must be amended within 3 years, and the distributions could have started more than 3 years previously.)If the taxpayer is 59 1/2 or older, there is no penalty on distributions after 59 1/2 even though they may have been part of a plan that started before 59 1/2 but was busted before the 5-year period was completed.2008-11-06 13:12, By: dlzallestaxes, IP: []

L2: Need Help with Tax Return After Breaking SEPPI’m 60 and surrendered the annuity a few months ago. I was told by the insurance company that I need to pay the penalty on the entire amount despite the fact that I am over 59 1/2. 2008-11-06 13:34, By: debrah107, IP: []

L2: Need Help with Tax Return After Breaking SEPPYou would have to pay the penalty onany amounts taken prior to your age 59.5 – age 59.5 isyour 59th birthday plus 6 months. 2008-11-06 13:42, By: gfw, IP: []

L2: Need Help with Tax Return After Breaking SEPPMoreover – when it comes to actual reporting specifics of a busted plan, there is even less information around, including even this site and the IRS instructions. So I will be winging this somewhat.The first point is to identify if you are doing what is known as a “voluntary bust” or a standard bust of the plan. A voluntary bust is where you need to break the plan to start a new one. For example, in your situation, if you were in compliance through 2007 and changed your plan in 2008 to a new plan, you could avoid the penalty on the 2008 distribution, just paying the penalty on plan distributions through 12/31/07. You would report that on a 2007 5329.More likely, you are not attempting to comply with any 72t distribution requirements in 2008, and therefore have busted the plan in 2008, a standard busted plan. If so, I would suggest reporting the retroactive penalty for all years including 2008 on a 2008 5329 (Part I)with an itemized breakdown attached. The breakdown should show the dollar distribution and 10% of that amount for each prior calendar year which was exempted from penalty because of the busted plan up through the end of 2008. You will not find any of this in the 5329 Instructions, which are silent on this issue.With respect to the interest that you will also owe, you could simply ignore it and let the IRS bill you. But if you want to stop the interest clock from running sooner, you could estimate the interest due using each quarter’s underpayment rate applied to the accumulating total of each year’s penalties that exist as of the particular quarter. I will leave that choice up to you, but would not be optimistic that the IRS would let the interest slide.2008-11-06 13:51, By: alan+s., IP: []

L2: Need Help with Tax Return After Breaking SEPPMy prior post did not contemplate the last two posts.You would still use the same procedure, but as noted by dlz and gfw you would NOT owe the penalty on any distributions that you actually took after reaching 59.5. You might break out the distributions for the year you reached 59.5 into those taken prior to 59.5 and those taken afterwards. For those taken afterwards, note that no penalty applies to them.Of course, be totally sure you know the actual modification date of your plan and be sure that you DID actually bust the plan prior to reaching your modification date.2008-11-06 13:58, By: alan+s., IP: []

L2: Need Help with Tax Return After Breaking SEPPHello Debrah:As several posters have already pointed out; it can be a challenge just figuring out on which distributions do I infact owe the 10% surtax. They are correct; generally the 10% surtax is owed on all premature (actually taken before age 59 1/2) distributions & usually this means all distributions. The exception is when a taxpayer commences their SEPP plan after attaining age 54 1/2 most likely resulting in some distributions occurring after that person’s 59 1/2 birthday — in that case the 10% surtax is owed on only the premature distributions.Now, how to report. On your 2008 tax return, complete form 5329. Line 1 of form 5329 would normally just be your premature distributions subject to the 10% surtax in 2008. Instead on line 1 put the total of all surtaxed distributions for all years so that the surtax itself gets properly computed on line 4 and posted forward to line 60 of your 1040. Then prepare an “ALERT” to your return. An alert is a plain piece of paper that says at the top “AELRT” followed by your name and SSN. In the text indicate that: (1) you are voluntarily prematurely terminiating a SEPP plan qualified pursuant to IRC 72(t)(2)(A)(iv) and (2) therefore a modification has occurred under IRC 72(t)(4); (3) therefore the surtax of 10% on all distirbutions (insert a schedule of amounts by year here) is due. Further, that you have reported this surtax on form 5329; therefore no additional surtaxes are due; howewver, interest is due for all prior years. Dear IRS, please compute the interest for me and send me a bill.Regards,TheBadgerwjstecker@wispertel.net2008-11-06 14:41, By: thebadger, IP: []

L2: Need Help with Tax Return After Breaking SEPPThank you all so much for your help! Maybe this isn’t quite as bad as I thought. Here are some details: I started the SEPP in 2006. First Dist paid: February 2006, $5,141; 2nd Dist paid: February 2007, $5,141; I turned 59 1/2 in December 2007. The third Dist was paid this year-February 08, $5,141 and the annuity was surrendered in September 08. If I am understanding what you have explained:I will pay taxes this year on the third distribution amount of $5,141 as well as the surrendered amount, but I will not have to pay the 10% early withdrawal penalty. I got a notice from the insurance company stating that the 1099 would be marked early withdrawal-no exception. Will that cause a problem? Ishould notify the IRS that I had two distributions of $5,141 each, prior to age 59 1/2 and I will need to pay the 10% penalty on those, andI will be billed for whatever interest accrued. Will that be a large amount? Also, I assume that I will not be able to use a software programlike Turbo Tax to do my taxes this year, but will have to do them manually?Again, thank you so much. This has been a big worry, especially in the current economic climate. I really appreciate this help. 2008-11-06 16:09, By: debrah107, IP: []

L2: Need Help with Tax Return After Breaking SEPPYou pretty much have it. The penalty will be a little over $1,000 for the two distributions. The early coding (Code1) on the 1099R will not change anything because the 5329 Inst cited by thebadger will explain the situation adequately.The interest should be less than $800.2008-11-06 19:35, By: alan+s., IP: []

L2: Need Help with Tax Return After Breaking SEPPThank you again, everyone. One more question. Do you think that I could do the return with Turbo Tax, but mail it in instead of sending it electronically since I need to include the Alert notice? 2008-11-07 05:07, By: debrah107, IP: []

L2: Need Help with Tax Return After Breaking SEPP2008-11-20 19:32, By: systematic12, IP: []

L2: Need Help with Tax Return After Breaking SEPPTurbo Tax should have the capabilities for you to continue to use it to prepare your tax return. It should have the ability for you to input the cumulative distributions pre-59 1/2 to prepare the 5329 form with your tax return, and to calculate the penalty.The “ALERT” schedule should show the distributions and related 10% penalty for 2006, as well as for 2007. You should also include a note with your date of birth, and the date of your 2008 distribution, and stating that it was after reaching 59 1/2, and therefore not subject to the 10% “early distribution penalty”.2008-11-20 21:11, By: dlzallestaxes, IP: []