2002 Tax Help Archives  

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Your Federal Income Tax

This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Reporting Deductible Contributions

If you file Form 1040, enter your IRA deduction on line 24 of that form. If you file Form 1040A, enter your IRA deduction on line 17. You cannot deduct IRA contributions on Form 1040EZ.

Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes.

Worksheet 18-1.  Figuring Your Modified AGI
1. Enter your adjusted gross income (AGI) shown on line 21, Form 1040A, or line 35, Form 1040 figured without taking into account line 17, Form 1040A, or line 24, Form 1040 1.       
2. Enter any Student loan interest deduction from line 18, Form 1040A, or line 25, Form 1040 2.       
3. Enter any Tuition and fees deduction from line 19, Form 1040A, or line 26, Form 1040 3.       
4. Enter any Foreign earned income and/or housing exclusion from line 18, Form 2555-EZ, or line 43, Form 2555 4.       
5. Enter any Foreign housing deduction from line 48, Form 2555 5.       
6. Enter any Excluded qualified savings bond interest shown on line 3, Schedule 1, Form 1040A, or line 3, Schedule B, Form 1040 (from line 14, Form 8815) 6.       
7. Enter any Exclusion of employer-paid adoption expenses shown on line 30, Form 8839 7.       
8. Add lines 1 through 7. This is your Modified AGI for traditional IRA purposes 8.       

Nondeductible Contributions

Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit ($3,000 ($3,500 if 50 or older) or 100% of compensation, whichever is less) or the spousal IRA limit (if it applies). The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.

Example.   Mike Jones is 28 years old and single. In 2002, he was covered by a retirement plan at work. His salary was $52,312. His modified AGI was $55,000. Mike made a $3,000 IRA contribution for 2002. Because he was covered by a retirement plan and his modified AGI was over $44,000, he cannot deduct his $3,000 IRA contribution. He must designate this contribution as a nondeductible contribution, as explained next.

Form 8606.   To designate contributions as nondeductible, you must file Form 8606.

You do not have to designate a contribution as nondeductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible.

You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year.

Failure to report nondeductible contributions.   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible. All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.

Penalty for overstatement.   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause.

Penalty for failure to file Form 8606.   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause.

Tax on earnings on nondeductible contributions.   As long as contributions are within the contribution limits, none of the earnings or gains on those contributions (deductible or nondeductible) will be taxed until they are distributed. See When Can I Withdraw or Use IRA Assets, later.

Cost basis.   You will have a cost basis in your IRA if there are nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions.

Inherited IRAs

If you inherit a traditional IRA, that IRA becomes subject to special rules.

If you inherit a traditional IRA from your spouse, you generally have the following choices. You can:

  1. Treat it as your own by designating yourself as the account owner.
  2. Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
    1. Qualified employer plan,
    2. Qualified employee annuity (section 403(a) plan),
    3. Tax-sheltered annuity (section 403(b) plan),
    4. Deferred compensation plan of your state or local government (section 457 plan), or
  3. Treat yourself as the beneficiary rather than treating the IRA as your own.

You will be considered to have chosen to treat it as your own if:

  • Contributions (including rollover contributions) are made to the inherited IRA, or
  • You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat it as your own if:

  • You are the sole beneficiary of the IRA,
  • You have an unlimited right to withdraw amounts from it, and
  • The distribution of the required minimum amount for the account for the calendar year of the decedent's death has been made.

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA.

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that contributions (including rollover contributions) cannot be made to the IRA and you cannot roll over any amounts out of the inherited IRA.

For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later.

Can I Move Retirement Plan Assets?

Traditional IRA rules permit you to transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. The rules permit the following kinds of transfers.

  • Transfers from one trustee to another.
  • Rollovers.
  • Transfers incident to a divorce.

Transfers to Roth IRAs.   Under certain conditions, you can move assets from a traditional IRA to a Roth IRA. See Can I Move Amounts Into a Roth IRA? under Roth IRAs, later.

Trustee-to-Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another. For information about direct transfers to IRAs from retirement plans other than IRAs, see Publication 590.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. The contribution to the second retirement plan is called a rollover contribution.

Note.   The amount you roll over tax free is generally taxable when the new plan distributes that amount to you or your beneficiary.

Kinds of rollovers to a traditional IRA.   You can roll over amounts from the following plans into a traditional IRA:

  1. A traditional IRA,
  2. An employer's qualified retirement plan for its employees,
  3. A deferred compensation plan of a state or local government (section 457 plan), or
  4. A tax-sheltered annuity (section 403 plan).

Treatment of rollovers.   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans.

Kinds of rollovers from a traditional IRA.   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan, including the federal Thrift Savings Fund, a deferred compensation plan of a state or local government (section 457 plan), and a tax-sheltered annuity (section 403(b) plan). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Time limit for making a rollover contribution.   You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Extension of rollover period.   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. For more information, get Publication 590.

Rollover From One IRA Into Another

You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.

Waiting period between rollovers.   If you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example.   If you have two traditional IRAs, IRA-1 and IRA-2, and you make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3), you can also make a tax-free rollover of a distribution from IRA-2 into IRA-3 (or into any other traditional IRA) within 1 year of the distribution from IRA-1. These can both be tax-free rollovers because you have not received more than one distribution from either IRA within 1 year. However, you cannot, within the 1-year period, make a tax-free rollover of any distribution from IRA-3 into another traditional IRA.

Exception.   There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution which meets all three of the following requirements.

  1. It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.
  2. It was not initiated by either the custodial institution or the depositor.
  3. It was made because:
    1. The custodial institution is insolvent, and
    2. The receiver is unable to find a buyer for the institution.

Partial rollovers.   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes.

Required distributions.   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.

Inherited IRAs.   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own.

Not inherited from spouse.   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period. For more information, see Publication 590.

Reporting rollovers from IRAs.   Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040 or lines 11a and 11b, Form 1040A.

Enter the total amount of the distribution on line 15a, Form 1040 or line 11a, Form 1040A. If the total amount on line 15a, Form 1040 or line 11a, Form 1040A was rolled over, enter zero on line 15b, Form 1040 or line 11b, Form 1040A. Otherwise, enter the taxable portion of the part that was not rolled over on line 15b, Form 1040 or line 11b, Form 1040A.

Rollover From Employer's Plan Into an IRA

You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

  1. Employer's qualified pension, profit-sharing or stock bonus plan,
  2. Annuity plan,
  3. Tax-sheltered annuity plan (section 403(b) plan), or
  4. Governmental deferred compensation plan (section 457 plan).

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution.   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except:

  1. A required minimum distribution,
  2. Hardship distributions, or
  3. Any of a series of substantially equal periodic distributions paid at least once a year over:
    1. Your lifetime or life expectancy,
    2. The lifetimes or life expectancies of you and your beneficiary, or
    3. A period of 10 years or more.

See Publication 575, Pension and Annuity Income, for additional exceptions.

Reporting rollovers from employer plans.   To report a rollover from an employer retirement plan to a traditional IRA, use lines 16a and 16b, Form 1040, or lines 12a and 12b, Form 1040A. Do not use lines 15a or 15b, Form 1040, or lines 11a or 11b, Form 1040A.

More Information on Rollovers

For more information on rollovers, get Publication 590.

Transfers Incident to Divorce

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For detailed information, see Publication 590.

When Can I Withdraw or Use IRA Assets?

There are rules limiting use of your IRA assets and distributions from it. Violation of the rules generally results in additional taxes in the year of violation. See What Acts Result in Penalties or Additional Taxes.

Age 59½ rule.   Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.

The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

Exceptions.   There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 591/2, you may not have to pay the 10% additional tax if you are in one of the following situations.

  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
  • The distributions are not more than the cost of your medical insurance.
  • You are disabled.
  • You are the beneficiary of a deceased IRA owner.
  • You are receiving distributions in the form of an annuity.
  • The distributions are not more than your qualified higher education expenses.
  • You use the distributions to buy, build, or rebuild a first home.
  • The distribution is due to an IRS levy of the qualified plan.

Most of these exceptions are explained in Publication 590.

Note.   Distributions that are timely and properly rolled over, as discussed earlier, are not subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. (See Excess contributions withdrawn after due date of return, later.) This also applies to transfers incident to divorce, as discussed earlier.

Contributions returned before the due date.   If you made IRA contributions for 2002, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.

  • You did not take a deduction for the contribution.
  • You also withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount.

Note.   If the trustee of your IRA is unable to calculate the amount you must withdraw, get IRS Notice 2000-39 or section 1.408-4(c) of the proposed regulations. These explain the IRS-approved methods of calculating the amount you must withdraw. This proposed regulation is published in 2002-33 Internal Revenue Bulletin at page 383. This notice and proposed regulation can be found in many libraries and IRS offices.

You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them.

CAUTION: Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Another exception is the return of an excess contribution as discussed under What Acts Result in Penalties or Additional Taxes, later.

Early distributions tax.   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax.


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