Nonperiodic Distributions

If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Nonperiodic distributions include cash withdrawals, distributions of current earnings, and certain loans. For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575.

The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. See Tax on Early Distributions, later.

Lump-sum distributions.   If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. You may be able to use the 10-year tax option to figure tax on the ordinary income part.

Form 1099-R.   If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain. The amount in box 2a minus the amount in box 3 is the ordinary income.

More information.   For more detailed information on lump-sum distributions, get Publication 575 or Form 4972, Tax on Lump-Sum Distributions.

Tax on Early Distributions

Most distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59½ are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution.

For this purpose, a qualified retirement plan is:

1. A qualified employee plan,
2. A qualified employee annuity plan,
3. A tax-sheltered annuity plan (403(b) plan), or
4. An IRA.

5% rate on certain early distributions from deferred annuity contracts.   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. On line 4 of Form 5329, multiply by 5% instead of 10%. Attach an explanation to your return.

Exceptions to tax.   The early distribution tax does not apply to any distribution that meets one of the following exceptions.

General exceptions.   The tax does not apply to distributions that are:

• Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service),
• Made because you are totally and permanently disabled, or
• Made on or after the death of the plan participant or contract holder.

Additional exceptions for qualified retirement plans.   The tax does not apply to distributions that are:

• From a qualified retirement plan after your separation from service in or after the year you reached age 55,
• From a qualified retirement plan to an alternate payee under a qualified domestic relations order,
• From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year,
• From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,
• From an employee stock ownership plan for dividends on employer securities held by the plan, or
• From a qualified retirement plan due to an IRS levy of the plan.

Additional exceptions for nonqualified annuity contracts.   The tax does not apply to distributions that are:

• From a deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,
• From a deferred annuity contract under a qualified personal injury settlement,
• From a deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or
• From an immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within one year from the date of purchase and are paid at least annually).

Reporting tax or exception.   If distribution code 1 (early distribution, no known exception) is shown in box 7 of Form 1099-R, multiply the taxable part of the early distribution by 10% and enter the result on line 58 of Form 1040. Write No on the dotted line. You do not have to file Form 5329.

You do not have to file Form 5329 if you qualify for an exception to the 10% tax and distribution code 2, 3, or 4 is shown in box 7 of Form 1099-R. However, you must file Form 5329 if the code is not shown or the code shown is incorrect (for example, code 1 is shown although you meet an exception).

Tax on Excess Accumulation

To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans generally must begin no later than your required beginning date (unless the rule for 5% owners applies). This is April 1 of the year that follows the later of:

• The calendar year in which you reach age 70½, or
• The calendar year in which you retire.

For this purpose, a qualified retirement plan includes:

• A qualified employee plan,
• A qualified employee annuity plan,
• An eligible section 457 deferred compensation plan, or
• A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).

5% owners.   If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions by April 1 of the year after the calendar year in which you reach age 70½.

Amount of tax.   If you do not receive the required minimum distribution, you are subject to an additional tax. The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall.

Form 5329.   You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan.

Additional information.   For more detailed information on the tax on excess accumulation, see Publication 575.

Railroad Retirement Benefits

Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.

Tier 1.   The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated (for tax purposes) like social security benefits. (See Social Security and Equivalent Railroad Retirement Benefits, later.)

Non-social security equivalent benefits.   The second category consists of the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB), and any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits is treated as an amount received from a qualified employee plan. This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Vested dual benefits and supplemental annuity benefits are fully taxable.

More information.   For more information about railroad retirement benefits, see Publication 575. -->

Military Retirement Pay

Military retirement pay based on age or length of service is taxable and must be included in income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable.

Veterans' benefits and insurance are discussed in Publication 525.

Social Security and Equivalent Railroad Retirement Benefits

This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement benefits.

Social security benefits include monthly survivor and disability benefits. They do not include supplemental security income (SSI) payments which are not taxable.

Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would have been entitled to receive under the social security system. They commonly are called the social security equivalent benefit (SSEB) portion of tier 1 benefits.

If you received these benefits during 2002, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form RRB-1042S if you are a nonresident alien).

Note.   When the term benefits is used in this section, it applies to both social security benefits and equivalent tier 1 railroad retirement benefits.

Are Any of Your Benefits Taxable?

To find out whether any of your benefits are taxable, compare the base amount for your filing status to the total of:

1. One-half of your benefits, plus
2. All your other income, including tax-exempt interest.

When making this comparison, do not reduce your other income by any exclusions for:

• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned in American Samoa or Puerto Rico by bona fide residents.

Figuring total income.   To figure the total of one-half of your benefits plus your other income, use the worksheet discussed later. If the total is more than your base amount, part of your benefits may be taxable.

If you are married and file a joint return for 2002, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours to figure whether any of your benefits are taxable.

If the only income you received during 2002 was your social security or SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable.

Base Amount

Your base amount is:

• $25,000 if you are single, head of household, or qualifying widow(er),
• $25,000 if you are married filing separately and lived apart from your spouse for all of 2002,
• $32,000 if you are married filing jointly, or
• $-0- if you are married filing separately and lived with your spouse at any time during 2002.

Worksheet. You can use Worksheet 2-B to figure the amount of income to compare with your base amount. This is a quick way to check whether some of your benefits may be taxable.

Worksheet 2-B. Base Amount

A.	Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.)	A.
	Note: If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of the amount on line A	B.
C.	Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total	C.
D.	Write in any tax-exempt interest income (such as interest on municipal bonds) plus exclusions from income (listed earlier)	D.
E.	Add lines B, C, and D and write in the total	E.
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount some of your benefits may be taxable. You then need to complete the Social Security Benefits Worksheet in the instructions for either Form 1040 or Form 1040A.

Base Amount Worksheet

Worksheet 2-B. Base Amount

A.	Write in the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include the full amount of any lump-sum benefit payments received in 2002, for 2002 and earlier years. (If you received more than one form, combine the amounts from box 5 and write in the total.)	A.
	Note: If the amount on line A is zero or less, stop here; none of your benefits are taxable this year.
B.	Enter one-half of the amount on line A	B.
C.	Add your taxable pensions, wages, interest, dividends, and other taxable income and write in the total	C.
D.	Write in any tax-exempt interest income (such as interest on municipal bonds) plus exclusions from income (listed earlier)	D.
E.	Add lines B, C, and D and write in the total	E.
Note. Compare the amount on line E to your base amount for your filing status. If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount some of your benefits may be taxable. You then need to complete the Social Security Benefits Worksheet in the instructions for either Form 1040 or Form 1040A.

Repayment of Benefits

Any repayment of benefits you made during 2002 must be subtracted from the gross benefits you received in 2002. It does not matter whether the repayment was for a benefit you received in 2002 or in an earlier year. If you repaid more than the gross benefits you received in 2002, see Repayments More Than Gross Benefits, later.

Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Your repayments are shown in box 4. The amount in box 5 shows your net benefits for 2002 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits are taxable.

Tax Withholding and Estimated Tax

You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad retirement benefits. If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. You can choose withholding at 7%, 10%, 15%, or 27% of your total benefit payment.

If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay estimated tax during the year. For details, get Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES, Estimated Tax for Individuals.

How To Report Your Benefits

If part of your benefits is taxable, you must use Form 1040 or Form 1040A. You cannot use Form 1040EZ.

Reporting on Form 1040.   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on line 20b. If you are married filing separately and you lived apart from your spouse for all of 2002, also enter D to the right of the word benefits on line 20a.

Reporting on Form 1040A.   Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on line 14b. If you are married filing separately and you lived apart from your spouse for all of 2002, enter D to the right of the word benefits on line 14a.

Benefits not taxable.   If none of your benefits are taxable, do not report any of them on your tax return. However, if you are married filing separately and you lived apart from your spouse for all of 2002, make the following entries. On Form 1040, enter D to the right of the word benefits on line 20a and -0- on line 20b. On Form 1040A, enter D to the right of the word benefits on line 14a and -0- on line 14b.

How Much Is Taxable?

If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Generally, the higher that total amount, the greater the taxable part of your benefits.

Maximum taxable part.   The taxable part of your benefits usually cannot be more than 50%. However, up to 85% of your benefits can be taxable if either of the following situations applies to you.

• The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
• You are married filing separately and lived with your spouse at any time during 2002.

Which worksheet to use.   A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. You can use either that worksheet or Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, unless any of the following situations applies to you.

1. You contributed to a traditional individual retirement arrangement (IRA) and your IRA deduction is limited because you or your spouse is covered by a retirement plan at work. In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your IRA deduction and your taxable benefits.
2. Situation (1) does not apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents. In this situation, you must use Worksheet 1 in Publication 915 to figure your taxable benefits.
3. You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915.

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