Starting prior to July 1, 1986, after-tax contributions made to a retirement plan were recovered (not taxed) in the first 3 years following retirement. Those who could not use the 3-year rule had to use a “General Rule” to figure their exclusion. The exclusion was for the taxpayer’s and surviving spouse’s life, and may exceed the contributions. (The requirement for employers to provide a joint and survivor pension plan option was established in 1974.)
Starting on July 1, 1986, a new “Simplified General Rule” for determining the recovery was created and the 3-year rule was repealed. Taxpayers could choose to use either the “General Rule” or the “Simplified General Rule”. The amount determined was based on the annuitant’s age only, even if a joint and survivor annuity, and the exclusion was for the remainder of the taxpayer’s and surviving spouse’s life.
Starting on January 1, 1987, the recovery amount was limited to the total amount contributed and is the current case today. Each year, it is assumed that the prior exclusions have been taken as allowed thus if they haven’t been taken, they are lost.
Starting after November 18, 1996, the Simplified General Rule was established as the only method for qualified retirement plans. Other plans still use the “General Rule” but only the “Simplified” method is in scope for the Tax-Aide program.
Starting on January 1, 1998, the “Simplified Method” exclusion was changed to be based on the ages of both the annuitant and the beneficiary.
Once a method is used to determine the exclusion amount, the same method must be used for the duration of the annuity.
The Tax Slayer Exclusion Worksheet:
When entering a 1099-R or RRB-1099-R, there is a link to the TS exclusion worksheet. The result of the worksheet carries back to the taxable amount and it cannot be adjusted further. You must record the amount, delete the worksheet and then manually enter the adjusted taxable amount.
A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. This amount can be added to the contribution amount to determine the survivor’s exclusion. You need to determine if this is already included in the contribution amount, line 9b, of the 1099-R?
A Public Safety Officer subtraction of up to $3,000 can be taken for health or long term care insurance paid – if paid by the distributor of the pension. ☣ SOFTWARE ERROR TaxSlayer subtracts the full amount before calculating the exclusion which may not be the best option for the taxpayer. If the exclusion results in $0 taxable, use the Annuity Calculator which does the exclusion first, then only uses the amount of insurance needed to reach $0. Then, the rest of the insurance can be used in Schedule A (along with any additional over the $3,000).
You can also use our Annuity Calculator to determine the amount to enter, which provides input for additional exclusions. TaxSlayer does not calculate the age – a common error made by preparers.
A surviving beneficiary continues to use the same exclusion amount until it has all been recovered.
Note: If this is the taxpayer’s final pension/annuity payment due to death and no surviving beneficiary, any remaining exclusion amount can be entered as a Schedule A Miscellaneous deduction on the final tax return.