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Updated on January 30, 2014

VITA Advanced Test Question 28

In the 2013 Advanced Test Certification for the VITA tax program, sponsored by the Internal Revenue Service, there is the following question found in IRS form 6744 VITA/TCE Volunteer Assistor’s Test/Retest 2013 Returns.

Question 28 on page 2-33: How much of the $17,500 gross distribution on Form 1099-R is taxable for 2013?

This question is from Advanced Scenario 8: Elliot and Kathy Blackburn.

In the interview notes the following pertains to the question. Elliot retired from the local school district and began receiving retirement income in March 2013. No distributions were received before that. They selected a joint survivor annuity for these payments.

The next step in this question is to look on page 2-28 at Form 1099-R from the Hickory Corporation for recipient Elliot Blackburn.

Box 1. Gross Distribution $17,500.

Box 2a. Taxable amount is empty and must be calculated.

Box 2b. Marked with an X. Taxable amount is to be determined.

Box 4. Federal Income Tax Withheld $1,750.

Box 7. Distribution Code 7 which is a normal distribution.

Box 9b. Total Employee Contributions $12,500.

The student must run the complete 1040 form for Elliot and Kathy Blackburn through Tax-Wise software in the practice mode provided by the IRS in the VITA program.

Within Tax-Wise form 1040, Form 1099-R for Elliot Blackburn fill in the required fields from the 1099-R provided by the Hickory Corporation.

The next step is to go to the Simplified Method to determine the taxable amount of the annuity.

1. Cost in the plan at the annuity starting date (RRB line 3). $12,500

2, Check age of primary annuitant at starting date. Mark 66-70 (Elliot is 68 years old.)
Check if annuity starting date is after 12/31/1996 and this is a joint and survivor annuity. Check this box because the annuity starting date is 03/01/2013 and it is joint survivorship. Use the table below and check combined age of annuitants at the starting date. Mark 111-120 because Elliot is 68 years old and Kathy is 51 as of March 2013 which adds to 119.

3. Exclusion per month is calculated by the software. $34.72

4. Number of months for which payments were received for this year. Fill in 10 months because Elliot started receiving his annuity payments in March 2013.

5. Skip line five.

6. Exclusion amount is calculated by the software $347

7. Remaining cost in the pension or annuity is calculated by the software $12,153

The final step is to determine the taxable amount in Box 2a. We subtract the exclusion amount from line six which is $347 from the gross distribution amount $17,500 and get $17,153.

[$17,500 - $347 = $17,153]

This amount $17,153 is the Taxable amount of the annuity which is placed inside Box 2a and is the answer to the question.

For those students who would like to learn the actual calculations go to IRS Publication 575 Pension and Annuity Income.


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