Form 8880 Line 4 Certain distributions - Is TurboTax Doing It Wrong?

[a1newman]

The IRS in https://www.irs.gov/pub/irs-pdf/p590a.pdf page 45 states " Eligible contributions. These include 1. Contributions to a traditional or Roth IRA; 2. Salary reduction contributions (elective deferrals, including amounts designated as after-tax Roth contributions) to: a. A 401(k) plan (including a SIMPLE 401(k)), b. A section 403(b) annuity, c. An eligible deferred compensation plan of a state or local government (a governmental 457 plan), d. A SIMPLE IRA plan, or e. A salary reduction SEP; and 3. Contributions to a section 501(c)(18) plan. They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribution will be voluntary as long as it isn’t required as a condition of employment." 

Then in the next paragraph, the IRS identified the reductions to that. Specifically, " Reducing eligible contributions. Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. Also reduce your eligible contributions by any distribution from a Roth IRA that isn’t rolled over, even if the distribution isn’t taxable."

I bolded the critical part as it appears that TurboTax is including any plan rather than only plans included under Eligible contributions. Specifically, TurboTax states "Roth IRA, traditional IRA, and qual plan distributions" in determining the value for line 4 and does not determine whether those plan distributions are under Eligible contributions. Thus it appears that Turbotax is not providing you with your maximum refund. If this is the case, will the maximum refund guaranteed apply?

[MaryK4]

Can you clarify what you mean?  TurboTax only uses distributions that are eligible for contributions to determine the amount that qualifies for the credit.

[a1newman]

I am assisting my sister who gets a regular pension from NY state of $5,989, This is not from a 403B or IRA or plan or annuity from eligible contributions. Thus, it should not be in line 4. TurboTax takes this amount and includes it in line 4 of Form 8880.  I have a PDF that shows this, but I do not know how to provide it here. Is there a way to remove it if TurboTax includes it erroneously?

[MaryK4 · Accepted solution]

Thank you for the clarification.  TurboTax pulls the information from the prior year returns, but you can make adjustments when you are in the Credit for Savings section to exclude the amounts from the pension.  (See below, it should look similar).  @a1newman 

[Critter-3]

The pension is a qualified plan and as such will limit the form 8880 credit ... the program is doing it correctly.  Read the instructions :  https://www.irs.gov/pub/irs-pdf/f8880.pdf

[a1newman]

The instructions in https://www.irs.gov/pub/irs-pdf/f8880.pdf read as follows:

Line 4
Enter the total amount of distributions you, and your spouse if filing jointly, received after 2019 and before the due date of your 2022 return (including extensions) from any of the following types of plans.
• Traditional or Roth IRAs, or ABLE accounts.
• 401(k), 403(b), governmental 457(b), 501(c)(18)(D), SEP, SIMPLE, or the federal TSP.
• Qualified retirement plans, as defined in section 4974(c)

My sister's pension is definitely not in the first 2 categories. I researched the last category.  Section 4974(c) reads:

(c) Qualified retirement plan For purposes of this section, the term ‘‘qualified retirement plan’’ means— (1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (2) an annuity plan described in section 403(a), (3) an annuity contract described in section 403(b), (4) an individual retirement account described in section 408(a), or (5) an individual retirement annuity described in section 408(b). Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary to be such a plan, contract, account, or annuity.

My sister's pension is none of those choices. It is a defined benefit plan which is not described above. Given what this is identifying per the IRS information, please explain how her pension is a qualified plan that limits the form 8880 credit as you claim.

[JulieS]

Please clarify how your sister's retirement distribution was reported. 

What code is in box 7 of your sister's 1099-R? 

[a1newman]

7 and there is nothing else in box 7.

[JulieS]

The instructions for code 7 in box 7 say:

"Use Code 7: (a) for a normal distribution from a plan, including a traditional IRA,
section 401(k), or section 403(b) plan, if the employee/taxpayer is at least age
591/2; (b) for a Roth IRA conversion if the participant is at least age 591/2; and (c)
to report a distribution from a life insurance, annuity, or endowment contract and for reporting income from a failed life insurance contract under section 7702(g) and (h).  Generally, use Code 7 if no other code applies. Do not use Code 7 for a Roth IRA."
 

The lack of a second code in box 7 implies this is a qualified retirement plan, which is why it is limiting the credit from Form 8880. 

If you don't agree you can contact the state comptroller's office and ask for a correction of the 1099-R form. Click here for contact information. 

[a1newman]

I fail to see how this addresses what the IRS identifies as what to include in line 4 of Form 8880.

Line 4
Enter the total amount of distributions you, and your spouse if filing jointly, received after 2019 and before the due date of your 2022 return (including extensions) from any of the following types of plans.
• Traditional or Roth IRAs, or ABLE accounts.
• 401(k), 403(b), governmental 457(b), 501(c)(18)(D), SEP, SIMPLE, or the federal TSP.
• Qualified retirement plans, as defined in section 4974(c)

My sister's pension is definitely not in the first 2 categories. I researched the last category. Section 4974(c) reads:

(c) Qualified retirement plan For purposes of this section, the term ‘‘qualified retirement plan’’ means— (1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (2) an annuity plan described in section 403(a), (3) an annuity contract described in section 403(b), (4) an individual retirement account described in section 408(a), or (5) an individual retirement annuity described in section 408(b). Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary to be such a plan, contract, account, or annuity.

My sister's pension is none of those choices. It is a defined benefit plan which is not described above. 

Your response about being a qualified retirement plan does not address the IRS requirement of a specific type of qualified retirement plan as defined above taken directly from the IRS. Please explain how code 7 which means Normal Distribution translates to being a qualified retirement plan within section 4974(c).

[Elonia_59]

I have two retirement accounts - an active 401k with my current employer, and one from an old employer that allows that 403(b) account to gain dividends without a rollover. That retirement account from which distributions were made is exempt because it is under the heading of "distributions from plan to which you cannot make contributions." That 403(b) account does not allow contributions. This choice is seen in the ITA on the IRS page. I also have a 7 in that box of the 1099-R, so TT has automatically denied the credit for years. This year I used 1040.com and it miraculously knew that the distributions were from an ineligible retirement account (pensions and annuities) and gave me the credit. Now, what to do about the previous years...

[dmertz]

"That retirement account from which distributions were made is exempt because it is under the heading of "distributions from plan to which you cannot make contributions.""

No, it's not exempt.  The limitation has to do with the type of account ("entity type" in section 25B(d)(2)(A) of the tax code) and has nothing to do with whether you are presently able to make contributions to that account.  Distributions from a 403(b) paid to the participant or a spouse beneficiary within the testing period always count.  See Chapter 3 of IRS Pub 590-A.  Congress put this limitation into the tax code to prevent people from claiming the credit under circumstances that would not result in an increase in voluntary retirement savings in qualified retirement accounts.

[Elonia_59]

Hi - this is taken directly from the Interactive Tax Assistant in the worksheet on the IRS site to determine if you are eligible for the credit. Some of the examples.

A Plan in Which Contributions Could Not be Made
In general, your qualified retirement savings contribution is not reduced by distributions you received from a
plan in which you could not make a qualified retirement savings contribution.
Some examples of these plans include:
A military retirement (other than the Thrift Savings Plan),
An inherited IRA in which you could not or did not treat as your own, or
An inherited qualified retirement plan, inherited 403(b) annuity, inherited governmental 457 plan, or
inherited section 501(c)(18) plan, in which you could not or did not treat as your own.

This is the complete questionnaire:

Interactive Tax Assistant (ITA)
Answers to Your Questions About Credits
Do I qualify for the Retirement Savings Contributions Credit?
You are a qualified individual for the Retirement Savings Contributions Credit. HIDE DETAILS
Your spouse is not a qualified individual for the Retirement Savings Contributions Credit. HIDE DETAILS
Your spouse did not make contributions to an eligible retirement plan.
Complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine the
amount of the credit.
Disclaimer
The conclusions above are based on information provided by you in response to the questions you
answered. This does not constitute written advice in response to a specific written request of the
taxpayer within the meaning of section 6404(f) of the Internal Revenue Code.
Review Screen
What tax year are you asking about? 2023
What is your filing status for 2023? Married filing jointly
Are you and your spouse claiming any of the following exclusions or deduction?
Foreign earned income exclusion,
Foreign housing exclusion,
Foreign housing deduction,
Exclusion of income from Puerto Rico, or
Exclusion of income from American Samoa
No
Is your and your spouse's adjusted gross income $73,000.00 or less? Yes
Did you make a voluntary contribution or an elective deferral to any of the following
for 2023?
Qualified retirement plan,
IRA,
401(k) plan,
403(b) annuity,
Governmental 457(b) plan, or
501(c)(18) plan
An ABLE account
Yes
Did your spouse make a voluntary contribution or an elective deferral to any of the
following for 2023?
Qualified retirement plan,
IRA,
401(k) plan,
403(b) annuity,
Governmental 457(b) plan, or
501(c)(18) plan
An ABLE account
No
What is your date of birth? xx/xx/59
Can you be claimed as a dependent on another taxpayer's return (such as a parent's
return) for 2023? No
Were you a full-time student during 2023? No
Did you take a distribution from an IRA, qualified retirement plan, 401(k) plan, 403(b)
annuity, a governmental 457(b) plan, an ABLE account, or a 501(c)(18) plan during
either:
2023 or
before the due date of your 2023 return including extensions or
during the two years prior to 2023?
Yes
Did your spouse take a distribution from an IRA, qualified retirement plan, 401(k) plan,
403(b) annuity, a governmental 457(b) plan, an ABLE account, or a 501(c)(18) plan
during either:
2023 or
before the due date of your 2023 return including extensions or
during the two years prior to 2023?
No
Did your distribution include any of the following:
nontaxable rollover or transfer,
conversion to a Roth IRA,
loan from a qualified employer plan treated as a distribution,
corrective distribution of excess contributions,
return of contribution,
dividends paid on stock by an employee stock ownership plan, or
distributions from a plan to which you could not make a contribution?
Yes
Were your distributions, after subtracting the amounts that were either a
nontaxable rollover or transfer,
eligible conversion,
loan from a qualified employer plan treated as a distribution,
corrective distribution of excess contributions,
return of contribution,
dividends paid on stock by an employee stock ownership plan, or
distribution from a plan to which you could not make a contribution,
at least as much as your contributions? No
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