TT handling of 1099-R pension rollover in connection with qualified dividends

[Ray_011]

I'm trying to complete my taxes (using TT deluxe), but noticed TT appears to be considering a non-taxable pension roll-over distribution (i.e., qualified plan rollover to 401K, full distribution, non-taxable), in determining the proper qualified dividend rate to apply.  

My roll-over was in excess of 450K, which coupled with ordinary and other income exceeded $700K.  Taxable income for 2023 is around $230K, which as I understand should attract a 15% rate, whereas at the $700K level it would be 20%.  TT is applying a 20% rate.  How do I force the software to apply the proper rate to the qualified dividends?  I'm assuming this is something I'm doing wrong, or an error in the software, rather than it being tax law that these rollovers be considered income in determining the qualified dividends rate.  Thanks in advance for your assistance.  

[Ray_011]

Noting that having stripped out all of the pension rollover, I'm still getting hit at the higher qualified dividend rate - therefore that was not the problem.  Looking more carefully at the detailed forms, it would appear that the MAGI is inflated above the 200K threshold as a consequence of how TT is treating a SSI repayment ($120K payment for years 2019 through 2022) - only 39K of this payment is related to 2022, and I have broken out the prior years using the TT feature for handling lump sum payments.  As a consequence my adjusted gross is calculated at $240, when 80K of this relates to prior years.  Unclear if their is relief for these circumstances.  Apologies in advance for prior message which was NOT the problem. 

[Hal_Al · Accepted solution]

TT is doing it correctly.

The prior year portions of the SS lump sum payment are taxed, on your 2022 tax return, using a special calculation. But, the income is still included in you AGI and MAGI. 

[Ray_011]

Is there any way to parse out the SS that corresponds to pre-2022 years?  I realize this income needs to be taxed, but it seems the recognition of the full boat in 2022 for MAGI has the unintended consequence of putting me in the "net investment income tax" space, which is what caused me to initially think I was being hit at the 20% rate on the qualified dividends.  Was surprised to see this given one goes to the trouble of breaking out the SSI payment over the prior years consistent with SSA-1099 reporting, and I did not in fact have over 200K in MAGI in 2022 (if only recognizing the 38K SSI in 2022).  Thanks for your prompt reply and insight.  

[Hal_Al]

Q. Is there any way to parse out the SS that corresponds to pre-2022 years?  

I don't think so, but I'll page some other opinions.  @dmertz @xmasbaby0 @Opus 17 

[Ray_011]

Thanks for your follow-up ... much appreciated.  At the moment the tax impact of the inflated MAGI is around $1,100, which of course I'd like to keep, but hopefully not a case of having to refile 3 years of tax returns.  Not sure the juice would be worth the squeeze ... Rgds, Ray

[dmertz]

Almost all individuals use the cash method of accounting, so even though the SS income was related to a prior year, because it was received in 2022 it is 2022 income.

[Ray_011]

Are there methods for not reporting via the cash method you describe?  I realize it is likely the most simple, but I'm assuming in my circumstances it results in the higher tax obligation.  In both 2020 and 2021 my adjusted gross was about 100K, and in 2019 (last year I worked) it was over 350K but the SS component for 2019 was only 8K. 

[dmertz · Accepted solution]

Changing accounting methods requires IRS approval.  See IRS Pub 538:

https://www.irs.gov/pub/irs-pdf/p538.pdf