I have a client who got retirement as US Military Retirement Pay, no state tax was withheld. HR block previously showed this under the Bailey settlement. She did NOT have 5 years of creditable service as of 1989 she worked from 88-2010. Asked her if she contributed to a 401K or 457 plan be 89, and she said they had no retirement in 88 and 89?????? She is adamant this is not state taxable, and no state taxes were withheld making me think she is right. HELP!
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Here's the summary of the Bailey rule:
She had to have 5 or more years of creditable service prior to August 12, 1989 in order for all of it to be exempt. If not, then show her the printout.Last edited by JohnH; 04-04-2013, 03:38 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
Thanks for the link John, taxpayer will NOT be happy! I'm doubting because there was no state withholding though, want to be right.Originally posted by JohnH View PostHere's the summary of the Bailey rule:
She had to have 5 or more years of creditable service prior to August 12, 1989 in order for all of it to be exempt. If not, then show her the printout.Comment
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She probably submitted an NC-4 instructing them not to withhold because HRB showed the income as non-taxable on her returns in the past. Since they led her to believe the income was not taxable, she just followed their lead. The lack of state withholding on the 1099-R is a result of her actions, not any sort of decision the issuer makes.
Also, you do know that Federal retirees in NC who do not qualify for full exemption of the income still qualify for a greater exemption than retirees receiving income form private plans. Private plan retirees get to exempt $2.000, whereas Federal retirees (and any local or state government retirees), get to exempt $4,000.Last edited by JohnH; 04-04-2013, 05:02 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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A bit more for you to consider
Sounds pretty much as if the Block person dropped the ball and did not understand the Bailey rules. (HOW is that possible??
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From the facts given, your client did not meet the criteria to exclude the income from NC taxation via the Bailey rule. Of course, there still is the $4k maximum (per person!) NC exclusion for "government" income.....the same thing even those younger NC retirees will eventually face.....so that might appease her somewhat.
Since you clearly stated "retirement" I will assume this is not of the 401(k) type scenario. As you likely know, there is some wiggle room there around the specific date for excluding the actual retirement income.
I can't help you on why no state taxes were withheld. (I just checked on Form 1099R for a retiree who receives Civil Service pension, clearly under Bailey, and NC withheld is zero. Whether that was "automatic" or the client told them not to withhold, I do not know. I also looked at the Form 1099R for a younger retiree with a similar Civil Service pension...CLEARLY not Bailey...and there is also NO NC withholding there.) In any case, your client obviously cannot use that as a "reason" it qualifies for Bailey!!
Now for the fun question: Since you are "obligated" to inform the client of the (apparent) error you have discovered, AND to tell her of the relevant tax consequences, is she gonna revisit the green box place to have them pay her interest/penalties for unreported (to NC) income. Hmmmmmm......
And then there might also be "Plan B" - she tells you to go jump in the lake and then goes back to that same Block preparer and hopes for the best.
FEComment
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Yes, I got the 4,000 deduction, but still not good! Thanks for the input, she will just have to not like me!Comment
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