Taxes on pension plan distributions

SC&H Group experts also address IRA contributions, stimulus payments

By Jim Wilhelm, Stuart Rudo and Greg Horning | Special to Baltimoresun.com

March 24, 2008

Baltimoresun.com's tax-advice column features three experts from the Sparks accounting firm SC&H Group answering questions about preparing your return every Monday until April 15.

Mary, Centreville: When I worked for my employer, taxable income on my W-2's was reduced by the amounts deducted for health, dental and prescription insurance. Now that I am retired and receive a 1099-R, the full retirement pay is shown as taxable income and not reduced by the health insurance deductions. Why is there a difference?

SC&H Group: Pension plan distributions that are used to purchase the cafeteria plan benefits noted in your question are not afforded pre-tax treatment for retired employees. The IRS issued a Revenue Ruling on this issue in 2003. There is one narrow exception to this general rule for retired public safety officers.

Lorraine, Brooklyn Park: To be eligible to convert IRA contributions to ROTH contributions, income must be below $100,000. Should the conversion be removed from Form 1040, Lines 22 and 37, in order to remain below the $100,000 threshold? This subject has never been clearly explained in any of the tax forms.

SC&H Group: Amounts in a traditional IRA can be converted into a Roth IRA if the taxpayer's adjusted gross income for the tax year does not exceed $100,000 and the taxpayer is not filing married filing separate. The conversion amounts are not taken into account when determining the AGI limitation.

John, Tafton, Pa.: We are a married couple who files jointly with one child under 16. With earnings a little over $50,000 last year, our federal tax liability was only about $700. Will we still get a $1,500 rebate?

SC&H Group: Your federal stimulus payment will be limited to your 2007 tax liability of about $700, plus $300 for your dependent child.

Answers to selected questions are published in The Sun's Money & Life section on Sundays and online on Mondays.