Code W on 1099-R

[kennsrq]

It says this Code W is a non-taxable distribution from a long term care policy. Box 8 is $321.00 and TurboTax says I owe $32.00 for this 1099-R. That is 10%. Is that a penalty even though it is non-taxable? I never received any money so why should I have to pay?

[jasonlovell2467]

Jason Speciner , CFP®, EA contradicts your Turbo Tax Answer however TT does not appear to have a way to not pay this tax.    John Hancock also says that this should not be taxable for Code W.   How do I properly do this in Turbo Tax?

[Jason-Speciner · Accepted solution]

A 1099-R that you receive with code W in Box 7 should not be included on your tax return. This 1099-R is issued for informational purposes only: showing the amount of a long term care insurance rider charge deducted from a life insurance policy cash value in Box 1, and the corresponding reduction in basis to the policy cash value in Box 8. The instructions included with this 1099-R should have clearly stated this. There is no tax or penalty due.

[SweetieJean]

"If a charge or payment was made against the cash value of an annuity contract or the cash surrender value of a life insurance contract for the purchase of qualified long-term care insurance, an amount will be shown in this box and Code W will be shown in box 7.You need not report these amounts on your tax return."

[Jason-Speciner]

Exactly!

[dmertz]

TurboTax uses the box 2a amount as the taxable amount of a code W Form 1099-R.  The issuer of the code-W Form 1099-R should have put a zero in box 2a.  However, the result seen by the OP suggests that a value of $321 was present in box 2a, resulting in the calculation of $32 of tax at a marginal tax rate of 10%.

The original answer to this question is misleading because TurboTax never calculates an early-distribution penalty on Form 5329 with regard to any code W Form 1099-R.

[DianeW]

The amounts are to be ncluded in box 1- charges or payments for qualified long-term care insurance contracts under combined arrangements. Enter Code W in box 7.  It was paid out on you behalf regardless if you received the cash.  This amount is taxable and subject to the 10% penalty.

Penalty Exceptions. There are very few exceptions to the penalty on Retirement distributions. Allowable exceptions to the 10% early (before age 59-1/2) withdrawal penalty  are:

• 1. Rollovers to another IRA (no tax due)
• 2. Disability
• 3. Medical costs exceeding 7-1/2% of AGI
• 4. Separation from service at age 55 or older (pensions & 401K but not IRAs)
• 5. Substantially equal periodic payments (SEPP)
• 6. Military reservist called to active duty
• 7. Public safety employees separated after age 50
• 8. IRS levy
• 9. Education expenses (Only IRAs; not available for withdrawals from 401k plans)
• 10. Court ordered spousal payments
• 11. First time home buyer (Only IRAs; not available for withdrawals from 401k plans)
• 12. Beneficiary
• 13. Unemployed Medical Insurance
• 14. Age 59-1/2

Instructions for this code:  Use Code W for charges or payments for purchasing qualified long-term care insurance contracts under combined arrangements which are excludable under section 72(e)(11) against the cash value of an annuity contract or the cash surrender value of a life insurance contract.

As you can see this is not one of the exceptions to the penalty.

[dmertz]

A code W Form 1099-R reports amounts that are explicitly excludible from income under Section 72(e)(11) of the tax code.  Since this distribution is not taxable, there is no penalty.  Section 72(e)(11) of the tax code also treats the distribution from the annuity as a nontaxable distribution of basis (to the extent of the basis in the annuity).

If the code W Form 1099-R reports a taxable amount in box 2a, contact the payer to obtain a corrected Form 1099-R.

[Pam18]

Agree that my 1099-R is completed correctly with Box 1 and 8 showing the amount of LTC that should be non-taxable and Box 7 contains a W.  However, TurboTax is completing a Form 5329 for this amount.  Net, the amount is non-taxable on Form 5329 using the Line 2 exception code of 12 but why is this form completed?  

[DaveF1006]

I think the program recognizes you are over 70 1/2 and requires you to take a RMD on any 1099R forms entered in a return. Then the 5329 tells the IRS that there is an exception and a RMD is not required on this particular distribution.

[tomd3711]

Had a call from a friend today asking how to handle a 1099-R from Lincoln Life Insurance Co with an amount in box 1, $0.00 in box 2a, W in box 7 and box 8 contained the same amount as box 1.  Friend claims he paid money out of his pocket for this annual premium for long term care insurance and he clearly indicated the money paid did not come from any other source.  I was thinking maybe he got the funds from some type of insurance policy.  He is reporting the document on his tax return just to account for the document, even though box 2a is $0.00 which, in my opinion is a way to ensure it is accounted for with the IRS.   He is using TurboTax to prepare and submit his return.

Any comments from anyone? 

[dmertz]

A code W indicates that the purchase was a QLAC purchased with funds from a retirement account, not an annuity paid for out of pocket.  Perhaps your friend made a contribution to an IRA and than separately purchased a QLAC with the IRA funds which might seem like paying for the contract out of pocket, but would actually be two separate transactions, both of which would need to be reported on the tax return.

Regarding my earlier reply about taxation of a code W Form 1099-R, as long as a zero is entered in box 2a of the code W Form 1099-R, TurboTax will properly treat it as reportable nontaxable income.  Do not leave box 2a blank on a code W Form 1099-R, otherwise TurboTax will inappropriately treat it as taxable.

[tomd3711]

dmertz - I do not agree with your statement about it being the purchase of a QLAC but rather think it is an error on the part of Lincoln National Life Insurance issuing a 1099-R.  We have had two LTC policies for twenty-three years now purchased from an insurance company and have never received a 1099-R.  My friend just purchased the policy outright through LNLI.  I read the instructions for issuing of a Form 1099-R online at the IRS site and no actions he took (i.e., direct purchase) call for this issuance of a 1099-R.  

I do agree with you that it is a non-taxable event as long as box 2a has a zero dollar amount entered in it.  He did place $0 in box 2a using TT and it did not make it taxable.  

[dmertz · Accepted solution]

It doesn't have to involve a contribution to an IRA and would not involve an IRA if the IRA/SEP/SIMPLE box is not marked on the Form 1099-R.  The code W Form 1099-R suggests that a QLAC was purchased from the cash value or surrender value of that annuity was used to purchase a QLAC, so perhaps this is being treated as a combined arrangement rather than a directly purchase the long-term care insurance.  I'm not sure that it matters much that it implies that the long-term care insurance is combined with a $0-value annuity, but it does seem odd.

Code W was introduced in 2010 along with QLACs.

[prettyspring]

Hi,

I have the same problem w/ Pam18.  My 1099-R: box 1 and box 8 have the same amt. Box 2a = $0. Box 7 = W.  Turbo Tax created Form 5329-S using the Line 2 exception code 12; Is this correct?  I am 60 yrs old.    Do I need to report this 1099-R?         or    Report 1099-R and Form 5329-S.    Thank you so much!