Question re: Form 1099-R Interpretation

[Guest Natalie]

After reading the text of many of the messages on this board, I can see that you are all professionals. Can anyone help a layman with a question?

As a result of leaving my employment under a separation agreement in 1997, I received severance pay. The amount was divided into two payments, the first of which was classified as severance pay. It was paid to me in 1997 and included as wages in my W-2 for that year. Normal withholdings were made and I reported the total W-2 amount as taxable income for 1997. I also made a direct roll-over from my 401K account at the company into an IRA in 1997.

In 1998, my previous employer made the second (and final) payment to me which was specified as compensatory damages under the terms of the separation agreement. No social security or income taxes were withheld from this payment. This 1998 payment was reported on a Form 1099-R, with the only entries being the dollar amount in Box #1 and the Distribution Code "7" in Box #7. The Distribution Code "7" indicates that this was a "Normal Distribution". No other boxes on the form 1099-R contain entries.

How do I report this 1998 distribution? Is the amount eligible to be rolled into some sort of tax deferred account?

Other possibly relevant information: I am 37 years old, have been a full-time mom since leaving my job, rolled my traditional IRA to a Roth IRA this year, and received the 1998 payment in question in January 1998.

Any advice would be most appreciated!

Thanks!

[Guest ERead]

I'm not a CPA by any means, however, sounds to me like you have a fully taxable distribution. You need to report the amount on the 1099 as income in 1998 when you file your return. I'd have a CPA or CFP review first just to be sure, someone who can sit down with you and review in detail the payments and your forms.

[Guest Dook]

I would agree with ERead that this is fully taxable to you in the year received. The fact that there was no withholding or payroll taxes simply indicates that this was classified by your former employer as a "business expense" rather than as a payroll expense for services.

[Guest David Dye]

Based on the information provided in your question, my first response would be that the employer listed your 1998 severance pay on the wrong form. The employer should have listed this on a Form 1099-MISC, not Form 1099-R. Besides working full-time as a Pension Consultant, I work part-time during tax season preparing individual income tax returns. I have seen many W-2 forms, 1099 forms, etc. where the employer did not complete the form correctly.

Form 1099-R implies that the pay was a distribution from a qualified plan (such as a pension, profit sharing, or 401(k) plan) or from some other tax-deferred vehicle (such as an IRA). The title of Form 1099-R is "Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc." Form 1099-MISC is used to report pay that doesn't fit any other type of 1099 form, including pay to employees for which no taxes have been withheld.

Even though the employer reported your severance pay on Form 1099-R, you can still use this for filing your income tax return. The fact that distribution code 7 (Normal Distribution) was used means that the "distribution" is not subject to the 10% penalty for early withdrawal. If the form had shown code 1, then you'd have another problem altogether.

The employer, in using the 1099-R form, should have shown the taxable amount of your "distribution" in Box 4 of the form. The fact that there was no entry in Box 4, that the employer didn't check if this was a Total Distribution, etc. just further illustrates that the wrong form was used. They reported to you (and to the IRS) an amount of 1099-MISC compensation as a 1099-R retirement distribution.

At any rate, assuming that the amount reported to you on the 1099-R form is the same as the amount of pay you received in 1998, I would have to say that the amount is fully taxable for federal and state income taxes (unless you live in a state with no income tax -- your profile doesn't say which state you're from).

You cannot roll over this amount to any type of tax-deferred account. First of all, it does not appear to be a valid distribution from some type of tax-qualified retirement plan. Second, even if it were a valid retirement distribution, you can only make such a rollover within 60 days from the distribution date. Since you received this money in 1998, the 60-day time frame has certainly passed already.

Hope that this helps.

[david rigby]

I agree with the posting by David Dye. Definitely not eligible for any special tax treatment as if it were from a qualified plan, unless there are facts not in evidence.

But let me suggest that the employer may have known it was the wrong form, but that was the only one they had, and they just neglected to type over the "R". Was the form prepared manually? If so, this may be what happened.

Not sure if you really must, but it might be worth asking the ER for a letter documenting that it was (inadvertently) the wrong form. Like chicken soup, it couldn't hurt.