Question

Using the simplified method, determine the tax-free amount of the following distributions from a qualified pension plan. Contributions, if any, are made with previously-taxed dollars. Use monthly payments table. (Round your answers to 2 decimal places.) Person A, age 59, made no contributions to the pension plan and will receive a $500 monthly check for life. Person B, age 66, made contributions of $23,000 to the pension plan and will receive a monthly check of $1,300 for life. Person C, age 64, made contributions of $19,000 to the pension plan and will receive monthly payments of $1,200 over her life and the life of her 67-year-old husband. Person D, age 55, made contributions of $32,000 to the pension plan. He will receive quarterly payments of $5,000 over his life and the life of his 58-year-old wife.

Answer 1

Following are the tax free amount in each of the individual cases :-

1 . Distributions from a qualified pension plans are tax free upto the amount attributable to the previously taxed contributions. Using simplified method , tax free amount is equal to previously taxed contribution divided by number of payments expected to be received determined as per IRC 72(d).

(a) . Entire payment will be taxable and there will be no tax free component. It is because person A, did not made any contribution to the plan thus entire payment never get taxed.

(b). It is to be noted that number of payments are 210 as per the monthly table. The tax free portion of each of the payment will be 23000/210 = $109.52.

(c) . Note that combined age of person C and her husband comes to be 131 years ( 64+67). And as per the table number of payments are 260. The tax free portion of each payment will be 19000/260 = $73.08.

(d). Combined age of person D and her husband is 113 years (55+58). Number of expected payment as per table will be 120 (360/3, since payments are QUARTERLY). Tax free portion of each payment will be 32000/120 = $266.67.