Savers Credit on Defined Benefit Pensioner?
Hi,
A taxpayer, otherwise eligible to take the Form 8880 Retirement Savings Contribution Tax Credit, is deemed ineligible to do so by his tax preparer due to the fact that he receives distributions from a Defined Benefit pension in excess of the contributed amount over the last 3 years.
Taxpayer was unable to voluntarily contribute any money of his own into this defined benefit pension plan and the proceeds are paid out on a 1099-R, with the IRA box unchecked. I do not know the IRC section # of the plan (be it 401a, etc.)
I am having a difficult time deciphering how distributions from this kind of plan invalidate the ability to take the Savers Credit, since it’s from plan into which the taxpayer couldn’t voluntarily put money in. Also, what information can I use to back up a position to take the credit (or be disallowed from doing so) other than the tax preparer saying, “my software made me do it!” I guess that the mere presence of 1099-R’s would cause the software to invalidate the credit, but that’s not always correct I’m sure.
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2017-03-09 02:15
This has been an ongoing issue ever since the Savers Credit came into existence in 2001. In 2002 under the JCWAA legislation, Sec 25B of the tax code was amended to indicate that line 4 reduction on Form 8880 only applies to distributions from certain accounts to which the participant could have made contributions. For qualified DB pension plans under Sec 4974(c), Pub 590 A indicates that such plans can only be contributed to by the participant in the form of voluntary after tax contributions. Most DB plans do not permit these contributions meaning that the participant could not have made contributions to those plans, only the employer contributed. The IRS has never synced up Pub 590A, Form 8880 Instructions, IRS on line explanation of the credit, and the tax code itself. Therefore, tax programs have mostly taken the easy way out and report any 1099R for such a plan as a line 4 reduction which usually eliminates the credit. In such a case, it is worth the effort to file a paper return with an explanatory statement why the taxpayer did not report the DB pension distribution as a line 4 reduction on Form 8880.