Retirement fund rollover isn't taxable

The Baltimore Sun

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H; Group.

On a direct rollover from a company retirement plan to a 401 (k) at a bank, is the gross distribution amount on the form 1099-R added to the total earnings, even though no federal tax is withheld?

-- Ted, Fallston

Direct rollovers between retirement plan accounts are generally not taxable. If you received a 1099-R, you should report the gross amount on Line 16a of Form 1040, but report $0 on Line 16b.

Can I just attach my brokerage account Form 1099 showing my short-term and long-term capital gains? Or must I list each security on my tax form? There are numerous transactions and to list each would be very cumbersome.

-- Bob, Baltimore

For numerous transactions, you have the option of reporting your transactions on an attached statement containing all the same information as Schedules D and D-1 and in a similar format. You can use the broker's 1099-B as long as it shows all of the required information necessary for the Schedule D. Also, make sure to include the summarized totals on your Schedule D, the result of which will flow to your Form 1040. Net long-term capital gains are subject to preferential federal tax rates. Please be sure to complete that schedule to receive that tax benefit.

How do I report cash received for stock I owned in Company A that was acquired by Company B? Part of the settlement was a specific amount of cash for each share of Company A as well as one half share of stock in Company B for each share of Company A. I have received a 1099-B for the cash distribution.

-- James, Columbia

When a company is acquired, shareholders of the original corporation are required to recognize gain from the receipt of cash and/or stock in exchange for the previously held stock. That said, often public companies engage in tax-free reorganizations. When they do, they will include information regarding what portion of the transaction should be taxable for shareholders and how to compute your tax basis in the new stock you hold. Generally speaking, in a tax-free reorganization, shareholders pay tax on the cash they receive and their income tax basis in the shares of the original stock transfers to the shares they receive in the acquirer. The holding period of the original stock carries over as well, and if the original stock was held for more than one year, the taxable cash received should qualify as a long-term capital gain. This area of taxation is quite complicated, so please consult the documentation you should have received related to this transaction and/or a professional tax adviser.

My wife is legally blind. It seems to me in previous years that legally blind people had two exemptions on the federal income tax form. Is that correct, or was it only available on the state return?

-- Seibert, Parkville

The IRS provides an "additional standard deduction" for taxpayers who are blind or over the age of 65 at the end of the taxable year. The additional standard deduction may only be claimed if the taxpayer is not itemizing his or her deductions, which makes it technically different from a personal exemption. If your wife is not itemizing her deductions, then she would be eligible to add the additional standard deduction amount to the basic standard deduction amount that everyone is entitled to based on their filing status. In addition, there are two Maryland tax benefits available to blind taxpayers, and there is a real property tax exemption of the first $15,000 of valuation on a principal residence owned by a blind person. For the Maryland tax benefits, please refer to the instruction booklet for Form 502.

I am a former Army officer and a current federal employee. In 2006, I bought into the Federal Employee Retirement System for the time I spent in the Army by making a deposit into the system of an amount equal to 3 percent of my basic military pay. Is that deposit deductible? If so -- given that I did not take the deduction on my already-filed return -- is filing an amended return the appropriate way to take the deduction?

-- Matt, Ellicott City

Typically, these types of retirement plans are financed from your salary and the amount that you contribute to the plan is not included in your Box 1 W-2 wages, which you report on your tax return. What should have happened is that your salary was reduced by the amount of your contribution to the Thrift Savings Plan. When you retire and begin withdrawing these funds, those distributions will be taxed. The income earned on your pre-tax contributions grows tax-deferred, again until distributions begin after you retire.

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