8880 Allowed or Disallowed?

[Black Bart]

Can't get this straight -- does an IRA withdrawal that is coded "7" (normal distribution) kill off/reduce the Retirement Savings Credit or not?

This IRA is just an ordinary, normal, deductible, non-mandatory, non-Roth, bank-issued IRA -- nothing special about it.

[David1980]

Yes. Logic being if they're taking money out of retirement they're not making a net positive contribution to their retirement.

(So the 1099-R IRA distribution as well as 2007/2008 distributions would reduce the amount of their contributions. IRA contributions would be on line 1 of 8880, the distributions on line 4, line 4 gets subtracted.)

[Black Bart]

Yeah, thanks.

Yes. Logic being if they're taking money out of retirement they're not making a net positive contribution to their retirement.

(So the 1099-R IRA distribution as well as 2007/2008 distributions would reduce the amount of their contributions. IRA contributions would be on line 1 of 8880, the distributions on line 4, line 4 gets subtracted.)

That saves me from a stress-attack 'cause I've always treated them so, but I saw something today that raised my doubts.

The 8801 instructions define "certain distributions" broadly: "Enter the total amount of distributions you, and your spouse if filing jointly,...receive from...traditional or Roth IRAs...401(k)..." etc. I always took that to mean any distribution (other than from mandatory/military/some federal plans) whether it was premature-1 or normal-7.

I picked up a new client today and he brought his '08 professionally-prepared return with him. He's 62 and took a $10K IRA code "7" distribution in 2008 while his wife made contributions to her own IRA and 401K for 2008. The preparer listed nothing in "certain distributions" of the 8880 and took a $1,000 RSC credit. Don't know what happened.

[thomtax]

I picked up a new client today and he brought his '08 professionally-prepared return with him. He's 62 and took a $10K IRA code "7" distribution in 2008 while his wife made contributions to her own IRA and 401K for 2008. The preparer listed nothing in "certain distributions" of the 8880 and took a $1,000 RSC credit. Don't know what happened.

Maybe that is why they switched to you this year. They may have heard from the IRS changing their refund, causing them to question how things were being done. So of course, they turned to a real pro - you. Best of wishes for the future.

LT

[RitaB]

A little off topic

I always enter those "certain distributions" on the Form 8880, I think it's line 4, whether or not the people contribute to retirement or their income is within the limits to qualify for the credit. It's nice to have that info roll over and not have to search for it later when they DO contribute to a retirement account, or their income is within the limits, etc.

AND, I don't know about you all, but I have a lot of people that contribute to 401(k)'s, change jobs and yank it outta there, contribute at the new job, etc. Yeah, I don't know what they're thinking, either.

BB, I would be interested to know if IRS picked up on the incorrect credit last year on your new clients. Sounds like it was pretty obvious, with 2008 info alone.

And, yes, you ARE a real pro!

[Black Bart]

Thanks Thom.

Maybe that is why they switched to you this year. They may have heard from the IRS changing their refund, causing them to question how things were being done. So of course, they turned to a real pro - you. Best of wishes for the future.

LT

I haven't talked to the clients about it yet, but I've got an idea that maybe they have not heard anything from IRS. I'd think it would be treated like a math error and turned down immediately, but if it's treated like a CP notice thing, then nothing would be coming until this summer.

Still, I'll bet that IRS can't cross-check these to see what kind of plan (qualified/non-qualified) the distribution came from and so will rely on preparers to judge whether it affects the RSC credit. If so, odds are nothing is going to come of it and the $1K deduction will stand. The ex-prepper did their taxes for years (I only got them 'cause he's slow -- always extends), is reputable, and (I thought) capable. They're not going to want to hear he's wrong and that they need to pay back $1,000. Come to think of it, mabye this isn't the first $5K he's pulled out.

I can speed things up but I can't pull a thousand-dollar rabbit out of the hat. Talk about a hard act to follow!

[Black Bart]

8880 continued

I always enter those "certain distributions" on the Form 8880, I think it's line 4, whether or not the people contribute to retirement or their income is within the limits to qualify for the credit. It's nice to have that info roll over and not have to search for it later when they DO contribute to a retirement account, or their income is within the limits, etc.

That's a good idea -- my software (ATX) doesn't roll them over half the time and it would be handy. Only thing, next time I'd probably never trust that all was posted and I'd go look at past three years again anyway.

BB, I would be interested to know if IRS picked up on the incorrect credit last year on your new clients. Sounds like it was pretty obvious, with 2008 info alone.

I'll post what I find out. If it was kicked out immediately everything will be okay, but if they haven't heard anything yet I'm not going to go into it with them just yet -- got to establish some credibility first or it won't do any good to broach the subject anyway.

And, yes, you ARE a real pro!

Thanx to you also (can I quote you?) but actually the credit belongs to Dave-eighty who knew the answer for sure right off with no ifs, ands, and buts.

[RitaB]

Good job, David1980

That was a good year, too.

BB, I also use ATX. Once I enter the distribution on line 4 Worksheet, it rolls over ever year. Never had a problem with it rolling over. (OK, except that year I lost my hard drive, and didn't have everything backed up. Yikes.)

Wish the program majically knew just from entering the 1099-R, but that's why we get the big bucks, huh? Hey, a check box on there saying send info to Form 8880 line 4 Worksheet would be sweet...

[Black Bart]

Found the answer

...BB, I would be interested to know if IRS picked up on the incorrect credit last year on your new clients. Sounds like it was pretty obvious, with 2008 info alone....

sooner than expected.

Came across a 3-yr.(06-07-08) return comparison and they did get Retirement Savings Contribution credits for the last three years. The wife's still contributing to her 401 and hubby started IRA distributions after 59 1/2. They got $1K RSC credit in '08, but very little in '06-'07 (small percentage--earnings too much). Still, it's kind of distburbing because it shows there's a hole in the dike and nobody's minding the store. Since they began taking it in '06 and still are, that confirms that IRS didn't catch it.
It doesn't mean we're going to rush out and cash in on lax compliance, but it does mean that competitors who don't know any better have an unfair advantage over us to the extent that clients equate refund amounts with competence.

[RitaB]

I suspected as much

There are preparers at an professional establishment here who give the credit to state employees. Defined benefit plans do not qualify. Never known anything to come of it. (Except incorrect credits.)