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IRS Drafts Update of Pension and Annuity Income Guide

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What You Need to Know

  • Publication 575 shows how officials think pension and annuity taxes work.
  • This year, there’s plenty about coronavirus quarantines.
  • The guide discusses hypothetical taxpayers John and Maria and their COVID-related distributions.

The Internal Revenue Service has released a draft version of an important financial services tool: an update of Publication 575: Pension and Annuity Income.

The new update is supposed to help taxpayers prepare their personal federal income tax returns for 2020.

The publication serves as a kind of retirement arrangement tax encyclopedia. It provides sections on disability pensions, insurance premiums for retired public safety officers and railroad retirement benefits, as well as sections on variable annuities, Section 457 deferred compensation plans and retirement plan distribution rollovers.

Publication 575 complements other IRS publications and instruction sets, such as the instructions on the back of some copies of the Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” and the publication “Instructions for Forms 1040 or Form 1040-SR.”

The IRS offers an online collection of Publication 575 guides going back to 1994.

Like the 2019 version of the publication, the 2020 draft version includes an extensive section on the tax rules for disaster relief provisions.

Unlike the 2019 version, the 2020 draft version has a page of information about tax rules related to the COVID-19 pandemic. The IRS refers to the disease by the name of the virus that causes the disease, SARS-CoV-2.

The IRS describes, for example, what happens to people who took distributions from retirement plans between Jan. 1, 2020, and Dec. 31, 2020, because of “adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to coronavirus.”

The IRS has also updated the Publication 575 vignettes: stories about how federal tax rules will affect specific fictional people.

In the 2019 version, the IRS talked about Maria getting a $45,000 retirement plan disaster distribution on Nov. 1, getting prompt reimbursement from her insurance company for a casualty loss, then repaying the $45,000 distribution in full.

In the 2020 version, the IRS has kept the story about Maria’s disaster distribution and adds a similar vignette about Maria getting a $45,000 coronavirus-related distribution. Just as she quickly repays the disaster distribution in full, she also repays the coronavirus-related distribution in full.

The IRS also expands the role of John. John receives a $90,000 disaster distribution in both the 2019 and 2020 versions of the guide. He ends up reporting $0 in income for the current tax year and can pay back only part of the distribution during the three-year payback period.

In the new draft version, John also gets a $90,000 coronavirus-related distribution, and he also has trouble with repaying that distribution.

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