Using the Simplified Method to calculate taxable income, I came up with $93K. TurboTax calculated and said I have $0 taxable income using the same method. Why?

[janicecamp60]

Retired in 2014, been using this method every year successfully.

[BillM223]

The Simplified Method is a way to disperse your "Basis" (after-tax contributions) in the pension over the course of some time frame, so that only some of the basis is returned tax-free to the taxpayer each year. Note that this process is for a qualified plan (like a 401(k)). Non-qualified plans do the return of basis upfront, so if there was enough basis in the plan, you could easily have a year in which the entire distribution is tax-free.

Since we have no idea what your plan is (or it is even a plan versus an IRA), nor any of your entries, we can only speculate on the difference. So what do you have, what is on the 1099-R, and what answers did you supply TurboTax in the 1099-R interview?

[janicecamp60]

The retirement plan was on the 'old' federal employee plan (before IRAs, etc). Every year the 1099-R lists Gross Distributions in Box 1, and 'UNKNOWN' in box 2a (taxable amount). Since March 1, 2014, we have used the Simplified Method Worksheet (SMW) to determine the taxable amount, even in years we have had a paid accountant. 

For example, say the distributions were $100k annually, paid out in monthly installments over the year. No initial lump sum distribution was paid. Employee contributions were about $150K. According to our calculations on the SMW (since the beginning of retirement), we take about $5K (exact same amount each year) off of the annual distributions to get our taxable income of approximately $95K. We then subtract the $5K from the Employee contributions to see how much is left in that category. 

this year, for some reason, the Turbo Tax form calculated the taxable income, using the numbers on the SMW, and came up with zero taxable income. 

I'm wondering if I can find out if there is a glitch in the system, or if I somehow entered something incorrectly? 

[Lisa3588]

Is it possible that you have recovered your total cost basis over the past 10 years (2014-2023) so that there is no remaining cost basis in your distributions?

[janicecamp60]

I'm uncertain what a cost basis is. On our 1099-R, we have a figure for Employee Contributions (about $200K). Each year, we get to take about $5K off of the annual distributions to reduce our taxable income. Besides these numbers, the 1099-R only ever lists Federal and state taxes paid, and the amount paid for health insurance premiums. There are no figures on it for anything like a cost basis. 

[BillM223]

@Lisa3588 

Nice thought, but if the entire cost basis had been returned to the taxpayer, then any future distributions would be 100% taxable, not zero percent.

@janicecamp60 

Your description of $100K and $5k per years and $95k taxable income sounds very plausible, which makes the zero taxable income this year very odd.

As I noted above, it's as if you told TurboTax that this was a non-qualified plan in the 1099-R interview, would should result in the entire basis being returned in the current year, hence the possibility of tax-free income (it depends on how much basis you still have).

So, let's examine two possibilities:

1. When you were asked if this was a qualified or non-qualified plan, you answered "non-qualified" by mistake. Your OPM plan is qualified, and making the wrong answer here causes you to miss all the questions for the Simplified Method calculation.

2. When you were asked do the screen entitled "Describe the Taxable Amount", you checked off that the amount in box 2a was used in previous years as the taxable amount AND on your current 1099-R, box 2a is empty.

Both ways will incorrectly cause the taxable income to be zero on a $100,000 distribution. Can we check these things before we get even nittier/grittier?

[janicecamp60]

Thanks! The first question in the interview is who is the plan for: my husband and me (survivor benefits). I uploaded the 1099-R into TurboTax, and it correctly shows all numbers. Where my 1099-R says 'unknown' for the taxable amount, the uploaded form shows a blank amount. Box 5 is solely for health insurance, so I confirmed that question. Next, I answered NO to rollovers, etc. Then- YES to receiving regular payments from the retirement account. Payments started prior to 2023- YES. 

Then, to the question about whether the taxable annuity was used as the taxable amount: the box says 'unknown' on my 1099-R, so I said NO . Then I answered YES to indicate I use the simplified method. I then filled in the start date (3/1/2014), plan cost , paid for 12 months this year, and previous amount recovered (approx 25K). 

I indicated YES to the next question if this plan covers more than one person (both spouses), our ages in 2014, and NO to 'under retirement age for this plan". 

Then, a box comes up "We used the Simplified Method.... the taxable amount is Zero". Since the program took me through all of these questions about the Simplified Method, I assume I must have entered that it is a qualified plan. I can't find where that question was asked in the 1099-R income section to confirm that entry, though. 

[janicecamp60]

I finally had to call Intuit and get help. The 1099-R uploaded as having a code 7 (nondisability) in box 7, and then it mistakenly added in a box 7a code of "N" (nontaxable distribution). Thanks everyone for your help!