Answering Your Clients’ Tricky Tax Reporting Questions
By Chad Neumann, CIS, CISP, CIP, CHSP
I have an IRA owner who completed a rollover last year. He is currently preparing his tax return and is looking for a copy of the account statement or Form 5498, IRA Contribution Information, to show that he completed the rollover contribution. We usually don’t send those until May, what do we tell this IRA owner?
Financial organizations must send an account statement to IRA owners and Form 5498 to the IRS by May 31 each year (financial organizations may use a copy of Form 5498 or a substitute Form 5498 to meet the account statement reporting requirement). It is the IRA owner’s responsibility to report the rollover when he files his Form 1040, U.S. Individual Income Tax Return. This is accomplished by reporting the distribution on Line 4a, IRA distributions, of Form 1040, and then reducing the distribution by the amount of the rollover and reporting that amount on Line 4b, Taxable amount. The IRA owner should also write the word “Rollover” next to line 4b. The IRA owner and his tax preparer can find this guidance by reviewing the specific instructions for Lines 4a and 4b, Exception 1, in the IRS Form 1040 Instructions.
One of our IRA owners said that she took a distribution from her IRA to pay for her daughter’s college expenses. She received a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and the distribution was reported as a code 1, Early distribution, no known exception. She is asking us to change the code 1 to a code 2, Early distribution, exception applies, because she used the assets for college expenses.
The IRS requires certain distributions that qualify as penalty exceptions to still be reported as early distributions with no known exceptions. This frees the financial organization from any obligation to confirm the IRA owner’s eligibility for the penalty exception. To claim the exception, the IRA owner must include IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with her tax return. On Part 1 of Form 5329, the IRA owner must list the applicable penalty exception to show that the penalty does not apply to the distribution.
I had a self-employed business owner ask about his SEP contribution. He made a 2021 SEP contribution in March 2022. He is wondering why his 2021 Form 5498 did not include that contribution.
SEP and SIMPLE contributions are always reported in the year they are made, not the year they are for. The detailed Instructions for Forms 1099-R and 5498 make this clear. In addition, the instructions on the back of Form 5498 include the following information.
Show SEP (box 8) and SIMPLE (box 9) contributions made in 2021, including contributions made in 2021 for 2020, but not including contributions made in 2022 for 2021. If made by your employer, do not deduct on your income tax return. If you made the contributions as a self-employed person (or partner), they may be deductible. See Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
An HSA owner said that he took a qualified HSA funding distribution from his IRA and contributed that amount to his HSA in 2021. He is wondering why he received a Form 1099-R that reported the distribution as an early distribution.
HSA funding distributions are reported as a series of two transactions. To show the assets coming out of the IRA, a distribution is reported on Form 1099-R as an early or normal IRA distribution based on the individual’s age. To show the assets going into the HSA, the contribution is reported as a regular HSA contribution on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information. Similar to a rollover, it is the HSA owner’s responsibility to report the transaction on Form 1040. First, the HSA owner must report the distribution on Line 4a of Form 1040. Then on Line 4b, he must report the distribution amount less the amount that was contributed to the HSA. The HSA owner should write “HFD” next to Line 4b. The HSA owner and his tax preparer can find this guidance in the IRS Form 1040 Instructions by reviewing the specific instructions for Lines 4a and 4b, Exception 4.
