Distributions, Pensions, and Annuities
Volunteers need to be aware of the exceptions to the additional tax on early distributions and complete Form 5329, Part I, if an exception applies:
Taxpayers frequently use an early distribution for household expenses or bills that are not on the list of exceptions. This situation does not require completion of Form 5329.
IRA distributions, pensions, and annuities are covered in the Retirement Income lesson. Tax preparers certified at the Basic level may prepare returns having retirement income with taxable amount determined. If the taxable amount has not been determined or if one of the exceptions to the additional tax on early distributions applies, refer the taxpayer to a volunteer with Advanced certification.
Be sure to note that some exceptions apply only to IRA distributions, some apply only to distributions from a qualified retirement plan, and some exceptions apply to both IRA and retirement plan distributions.
If Form 1099-R correctly shows code 1 in box 7 indicating an early distribution, the additional tax usually applies. Guidelines permit entering 10% of the taxable amount directly on Form 1040, line 58. "No" is entered to the left of line 58 to indicate Form 5329 is not required. The tax software does this automatically, based on entries on Form 1099-R.
John, who is 39 years old, received Form 1099-R with code 1 in box 7. He used the money to pay for car repairs. For the additional tax, enter 10% of the taxable amount on the applicable line of Form 1040. The word "no" appears to the left of that line to indicate that Form 5329 is not required.
Laura is 41 years old and received an early distribution from her 401(k) account. The volunteer determines that Laura used the money for unreimbursed qualified medical expenses that meet the requirements for code 05. In this case Form 5329, Part I, would be completed. Laura would not have to pay the additional tax on this distribution.