ESOP STOCK DIVIDENDS REPORTED ON FORM 1099-R

[jrpeter2]

For the 2019 tax year, I received a 1099-R form with notes and a distribution code specifically identifying the total taxable amount on the form as stock dividends.  I am 65 so eligible for distribution without penalty and coincidentally have a taxed paid balance in the account that exceeds the value of the stock.  I have received separate 1099-R forms from the same source for other retirement distributions which I believe fully fit the definition of retirement distributions.  Why is Turbotax calculating a 5% higher tax rate if I enter the dividends as a retirement distribution compared to stock dividends?  Does the IRS allow me to claim these dividends as dividends?  If it must be taxed at a higher amount, how is that higher amount determined and what is the logic behind the higher amount?

[macuser_22]

Gains and losses on securities  held in qualified, tax deferred, retirements plans are not reported of claimed outside of the retirement plan.   Your retirement plan will simply have more or less money to be taxed on when withdrawn.

Taxable distributions from those plans are taxed as ordinary income at your marginal tax rate.

[jrpeter2]

Thank you for the quick response.  I have made two copies of my tax return that are identical except for entering the said ESOP Stock dividends as 1099-R or 1099-DIV in the personal section using Turbotax Home & Business.  Program calculates ~$1000 higher federal tax when entered as R as compared to DIV.  Can not locate how that difference occurs.  The way I understand your response there should be no difference between the two.  Is that correct?

[dmertz]

Your code U distribution is taxable as ordinary income, not as qualified dividends.  You are not permitted to report the income as qualified dividends.

[macuser_22]

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@jrpeter2 wrote:

The way I understand your response there should be no difference between the two.  Is that correct?

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I did not say that there is no difference "between the two", but here is no "two" to choose from.   ESOP reported oi  a 1099-R can only be reported one way.

[jrpeter2]

Ok yes I get your point. Government wants R form income entered in the R box and DIV form income entered in the DIV Box......Then again reporting as a dividend in Turbotax takes your loyal customer to check boxes as follows:

Learn More link defines ESOP stock as follows:  "An Employee Stock Ownership Plan (ESOP) is a retirement plan in which you can invest in the stock of your employer. Usually the purchases of stock are funded by contributions based on your compensation."  That certainly described how I obtained the stock and how it ended up in my retirement savings account.  Is my former employer (I am now retired) sending my ESOP dividend distribution information using the wrong form?

[dmertz]

The "This is an ESOP distribution" checkbox is a vestigial checkbox that should have been removed from TurboTax 11 years ago.  Prior to 1990, Form 1040A did not support the reporting of retirement distributions, so in 1985 the IRS allowed ESOP distributions to be reported on Forms 1099-DIV to avoid forcing those who would otherwise use Form 1040A from having to switch to Form 1040.  The IRS permitted this alternative reporting of ESOP dividends on Form 1099-DIV through the 2008 tax year.  Beginning with the 2009 tax year, the IRS no longer permits the payers of ESOP dividends to report the distributions on Form 1099-DIV.

See IRS Announcement 2008-56:  https://www.irs.gov/pub/irs-drop/a-08-56.pdf

[jrpeter2]

Dear Experts, Thank you for all your excellent, timely responses and, in particular, the followup to resolve the issue in my mind.

[macuser_22]

@dmertz  I will report this as a bug.

[dmertz]

I suspect that these old things get retained in TurboTax for two reasons:  1. Making any change has a chance of inducing unanticipated negative side effects in the operation of the program.  2. They probably don't want to remove unused fields from the internal record structure since that can produce compatibility problems between updates.  So it probably makes the most sense to remove this from step-by-step mode but not from forms mode.