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?
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.
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.
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?
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.
"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."
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.
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:
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.
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.
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?
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.
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?
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.
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.
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.
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!
It seems to me that Form 5329 would only have been created with code 12 on line 2 if you explicitly made an entry of an amount for Other reason exception for a distribution mistakenly entered with code 1 that you subsequently corrected. Make sure that you actually did select code W on TurboTax's 1099-R form. You should be able to simply delete the Form 5329 and it should stay gone.
So, my husband and I are definitely under 70 1/2 years old and therefore do not have to take Required Minimum Distributions. With our life insurance policy comes a rider for a qualified long term care contract. We get a 1099-R every year showing what is allocable to the contract. Box 1 has an amount and Box 8 has the same amount and then there is a code W in Box 7. There are no other codes and nothing else is checked off. This year for 2020 I went into TT and as I was completing the taxes, I put all the entries in the step by step instructions, as I have done in the past many times and this time a form 5329 popped up with a code 12 in it. This has never happened before, so I inspected my previous years entries against what I did this year with the 1099-R and they were all the same. I deleted out the 1099-R's and the 5329's and tried again and just as I would create the 1099-R, again the form 5329 popped up. So, again I deleted out the 1099-R and the 5329 again. The only thing in the 5329 was the amount in the 1099-R and the code 12 in it. Well, I wasn't giving up. I would rather report all information returns, because the IRS has that information. So, I went into the forms and I called up a form 1099-R instead of using the step by step instructions. I typed in the form I needed, 1099-R and opened up a new form and I put everything in the form itself. Where the Code W came up the W came up with two lines of words for one sentence, so I pressed on the second line of wording, (don't know if that did the trick or not), but it was all one sentence. It is just that on my computer it rolled into two lines. I entered everything in. I entered the amount in box 1 and box 8 and a zero for box 2a. I put the state and state ID in made sure to go over the EIN number for the payer, the name, the address and made sure the normal 1099-R box was checked off at the top. I made sure my own info populated as the recipient. I was very careful and looked constantly after every step I took to see if the form 5329 would pop up. Well it did not. No form 5329 popped up. I agree with Jason that when I look at the back of the 1099-R form for instructions regarding long term care contract charges, you do not have to enter the 1099-R form in your taxes, but I always have. The reason is you can call the IRS and you really can get 10 different answers from 10 different people who work from the IRS as they all have their own interpretations. Regardless, this is what I did. Better to be safe than sorry. However, Jason is right, it does say right on the 1099-R you do not have to enter the 1099-R form. But, if you are like me. Well go ahead and try what I did. Don't go through the steps, use the form itself. Delete out the 1099-R and the 5329 and manually enter it into the form.
Hi Pokey54,
Per your instructions “So, I went into the forms and I called up a form 1099-R instead of using the step by step instructions. I typed in the form I needed, 1099-R and opened up a new form and I put everything in the form itself. “
How do you call a NEW form? Under ‘View>Forms’ After I deleted Form 1099-R and Form 5329-S TT only displays the forms that it generate for my tax return.
Thank you!
So, go into Forms, should be on the top blue bar on the right side. It would be up to the top of the screen to the right of your estimated Federal & State Refund, thus far. Once you are in forms, on the left right below the blue bar you will see Open Form and Errors. It is below the blue bar where it says Turbo Tax and the version. My version says Turbo Tax Home & Business and right below that on the left hand side of the screen you can see open form and you can see errors. Press Open Form. Type in the search Box 1099-R
You will get multiple options. Press on the line that says Form 1099-R Pensions/IRA Distributions.
You can double click on it or you can highlight it and press open form. If you double click it it will come to an Add Form Page. You will name it here, such as Whom you got the form from, Ameriprise, State Farm, etc. Doesn't really matter what you name it. That's just for your reference. Then press add form.
Hi briggsr,
Thank you! I was able to add the new form 1099-R, updated, and saved it without TT generating form 5329.
🙂
I received this 1099-R with Code W. Your explanation is what was stated on the cover letter from Lincoln Life Insurance. My question though is, since my form shows an amount, is that something I can add to my medical expenses? If it is, it will help me pay less tax since I have some other medical expenses that I paid out if pocket. Thank you for any help.
I think you could make a case for deducting the case of the LTC rider if the IRS ever questioned it.
Here is the background info I posted in response to your previous posting:
The IRS states that "[a] qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services." Pub. 502 - Medical and Dental Expenses
If the cost of the LTC rider is deducted from the cash value of the life insurance policy you cannot deduct the premiums as a medical expense.
If you have a whole life insurance policy, you can, however, take the position that the cost of the LTC rider is eligible for a deduction as a medical expense. This is because the LTC rider charges on whole life policies are taken before premium dollars are placed in the cash value account. The tax code is unclear regarding this position.
Life insurance premiums are not deductible, so if you decide to take a deduction, the deduction should be for only the costs of the LTC rider.