Reporting Common IRA Transactions on Individual Tax Returns

Estimated reading time: 3.5 minutes

As we approach the end of the year, many taxpayers are gathering information to prepare their individual tax returns. Some of the questions we’re asked most often around this time of year are about IRA transactions. Let’s take a look at some of the most commonly asked questions.

How do I report a distribution from my IRA? Do I need to report a rollover?  

Distributions from IRAs are reported on IRS Form 1099-R. The 1099-R has a deadline of January 31 of the year following the year the distribution occurred. Your custodian will send you the form before the deadline if applicable. Box 7 of the form contains the IRS code that depicts the type of distribution taken from an IRA.

Not all types of distributions are taxable. For example, the recharacterization of a current year contribution is not taxable. Other distributions, on the other hand are. Some of the IRS codes on box 7 of the IRS Form 1099-R to look out for are Codes 1,7, J, T, 8, and P. These codes depict that there may be a portion of the distribution that is taxable. Distributions from Traditional IRAs are typically taxable since deductible contributions and earnings have not been taxed. Non-deductible contributions are not taxable since the IRA holder was not able to use those contributions as a deduction. Those contributions should have been tracked on an IRS Form 8606 in the year the contributions were made. In the year of distribution, the proportionate portion of the taxable and non-taxable portion must be distributed and only the taxable portion should be included as taxable income.

Part I of the IRS Form 8606 is used to delineate the two types of dollars being distributed. The distribution is reported on an individual’s tax return called the IRS Form 1040. Line 4a of the form depicts the amount distributed and 4b the amount taxable. If a distributed amount is rolled over, the instructions state to report the amount distributed on line 4a and if the full amount was rolled over, put “0” on line 4b and write in “rollover” beside line 4b. Many who have taken in-kind distributions also state that the amount of the in-kind distribution does not match the amount of the rollover since the value of the asset may have increased or decreased. An additional form may need to be filed, IRS Form 8275, which can be used to explain to the IRS the difference in values.

My IRA investment received a K-1 from an investment company. Is it taxable?

IRA investments that have taxable income will subject the IRA to file a tax return. For the IRS to file a tax return, the IRA must acquire its own EIN number. The form used for acquiring this number is the IRS Form SS-4 which can be accomplished online. IRA investments that have taxable trade or business income, must file a tax return using the IRS Form 990-T. The threshold that depicts whether the IRA should file this form or not is if the gross income of the IRA is $1,000 or less. Other types of income on the other hand are not subject to taxation. The examples of such income include interest, dividends, rents, royalties, and rights. Publication 598 is a good resource to learn more about these related taxes.

I took a distribution due to COVID-19. How is it reported on my tax return?

Lastly, individuals affected by the COVID epidemic were given relief by the United States Congress, allowing individuals to distribute up to $100,000 from any retirement plan penalty free. The taxation on the distribution may even be spread out ratably over a three-year period. The form used by the taxpayer to declare the spread of taxation is the IRS Form 8915-E. Although the full amount is still reported on line 4a of the IRS Form 1040, the taxable portion is reported on line 4b.

This information should provide useful instruction as to how you can declare these common IRA transactions in your tax return. If you have further questions, consult with a tax professional who can guide you through the process.