1099 R Code W and Form 5329

[Denby1]

I get a 1099R from Lincoln National for payments from a life insurance policy that go to pay for purchasing a qualified long-term care product.  Box 7 is correctly filled in as W.  TurboTax creates Form 5329, indicating that the distribution was an incorrect early distribution, exception number 12 (Distributions incorrectly indicated as early distributions by code 1, J, or S in box 7 of Form 1099-R).  How do I get TurboTax to not create this form, which I do not believe I am required to file.  

[MinhT1 · Accepted solution]

Code W means Charges/payments for purchasing qualified long-term care insurance contracts under combined arrangements.

This isn't a distribution and you don't need to report this form 1099-R on your tax return.

You can safely delete that form from your tax return.

[Denby1]

Thank you!  Can you refer me to somewhere in the IRS Tax regulations where if specifically says this?

[MinhT1]

This is an extract of this document:

(11)Special rules for certain combination contracts providing long-term care insurance

Notwithstanding paragraphs (2), (5)(C), and (10), in the case of any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract—

(A) the investment in the contract shall be reduced (but not below zero) by such charge, and

(B) such charge shall not be includible in gross income.

[Denby1]

Thank you again!  So, I would read this to say that the amount is not included in gross income, which it was not, even when I had the 1099R in my return, as opposed to not having to report it to the IRS.  Your read on this is that the 199R does not need to be included into the return?

[ThomasM125]

If the form 1099-R as reported would not increase your tax, then the IRS would have no reason to take exception to it not being reported on your tax return. They would only send you a notice if they were aware of income reported to them that was not reported on your tax return and that resulted in an increase to your tax.

[Denby1]

Thanks to you both, I really appreciate the help.

[stevec480 · Accepted solution]

I received the same type of 1099-R which generated an unnecessary form 5329 with an (nonsensical) exception code of '12' on line 2, which doesn't generate any additional tax.

When you look at the note in the upper right corner of the 1099-R it says:

"Report this income on your federal income tax return.  IF this form shows federal income tax withheld in box 4 [THEN] attach this copy to your return."

Since box 4 is empty (NO tax withheld) it isn't necessary to include this 1099-R on the return.

[Denby1]

Thanks.  It's great to have the community support.  Appreciate the assistance.

[mkaprelian]

I have this same issue: A Form 1099 R from New York Life with an amount in box 1, the same amount in box 8 and code W in box 7. I think the gist of the discussion here is correct: No Form 5329 should be created and that the solution is to simply delete the Form 1099 R.

I write separately to note (1) this seems to be bug, or at least an improvement opportunity, in the TurboTax software; and (2) upon a close reading of New York Life's "Instructions for Recipient," the instructions for box 1 include the following:

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.

Also, the instructions for box 8 include the following:

If charges were made for qualified long-term care insurance contracts under combined arrangements, the amount of the reduction in the investment (but not below zero) in the annuity or life insurance contract is reported here.