As if winter isn’t dreadful enough for those of us warm-weather lovers, at this time of year another certain unsavory topic is likely to preoccupy our thoughts—taxes. You know, that necessary evil that everyone wishes wasn’t so painful? Since it’s on all our minds though, we thought we’d talk about a few of the common tax issues that come up regarding your LAGERS benefits.
Generally speaking, your LAGERS benefits are taxable. The Internal Revenue Code doesn’t require you to include in your taxable income the amount your employer contributes to LAGERS on your behalf, but you will pay taxes on the distributions you later receive from the plan. If you were not required to contribute to LAGERSthen your benefit will be 100% taxable. We will withhold both federal and Missouri state income taxes on monthly benefits at your request. The following are some of the other common issues or questions regarding your LAGERS benefits:
- Employee contributions: If you are required to contribute 4% of your salary to LAGERS, those contributions should be included in your taxable income, subject to all payroll taxes, including federal and state income taxes. Your W-2 should just include the amount contributed in box 1, “Wages, tips and other compensation.” The contributions should not be reported in any other box on the form unless your employer wants to provide them as information only in box 14. The only evidence on your W-2 that you participate in LAGERS should be a check mark in box 13 “Retirement Plan,” regardless of whether you have to make contributions or not. Please note that these contributions are very different from any tax-deferred contributions you may make to a 457(b) plan for example. Those deferrals are not included in your taxable income until the time you make withdrawals. Many tax-preparers are not even aware of the distinction, but it is an important one.
So how do we make sure you aren’t taxed again when you receive distributions from LAGERS? If you terminate employment and receive a refund or lump sum payment from LAGERS, the full amount of contributions you made to LAGERS is reported on a Form 1099R as non-taxable. If you retire and receive a monthly benefit, any contributions you made are allocated over your expected life span as non-taxable amounts. Interest on contributions is always taxable.
- Taxes on one-time distributions: When you receive a one-time payment (refund, lump sum, partial lump sum option in conjunction with a monthly retirement benefit), unless you do a qualified rollover to a tax-deferred plan, LAGERS is required by the Internal Revenue Code to withhold 20% of the taxable amount of the payment and send to the IRS on your behalf. Whether this is enough or too much tax will depend on your total taxable income at the time you file your annual income tax return. You may owe less or get monies refunded to you, but the withholding requirement is always 20%.
In addition, unless you meet one of the statutory exceptions (you are disabled, you are receiving the benefit as a survivor, you are over age 50 if public safety or over age 55 if a general employee) you will likely be subject to a 10% penalty assessed by the IRS when you file your annual tax return. The distribution code LAGERS includes on your Form 1099R will alert the IRS as to the applicability of the penalty.
- Missouri income taxes: Very importantly for any of you who move out of the state of Missouri and are having us withhold state income taxes from your monthly retirement benefit, please tell us to stop! We try to watch for this when we notice address changes, but until you direct us to stop withholding we will continue to do so, and the withholdings are only for the state of Missouri. It’s to your benefit to not have monies sent to the state when you will no longer be filing Missouri income tax returns.
The other big thing to know about Missouri income taxes is the existence of the Public Pension Exemption. When you receive a public pension in Missouri, a portion of it is excludable from your taxable income. The exclusion amount depends on your adjusted gross income, but is limited to $36,976 per spouse for 2015. Please see the Missouri Department of Revenue’s website at http://dor.mo.gov/personal/ptc/pension.php.
- Disability retirements: This is a confusing area tax-wise for many, including tax preparers. A big reason for this is that disability benefits may be taxable or non-taxable depending on how they are calculated. LAGERS disability benefits are taxable, and the Form 1099R provided to you each year reflects this. If you were required to contribute to LAGERS, a non-taxable allocation pertaining to those contributions will be reflected on your 1099R beginning the year you reach normal retirement age.
- Purchases of service: Besides regular employee contributions discussed earlier, some of you may have purchased service such as military time. How your benefits are later taxed depends on the source of funds you used to make the purchase. If you transferred funds to LAGERS from another qualified retirement plan that were not previously taxed, then your benefits will be entirely taxable when they are paid to you. On the contrary, if you used personal funds for the purchase that had been previously taxed, then that portion of your benefits will be non-taxable.
- Form 1099R: You will receive this form when you receive a one-time distribution or after year-end when you receive monthly benefits from LAGERS. The forms are required by law to be in the mail by January 31st, and are also available to you through myLAGERS for retirees. The LAGERS website offers an excellent tool for explaining the different boxes on the form—take a look at http://www.molagers.org/taxes---1099-rs.html.
No doubt this will come as no surprise to you, but the Internal Revenue Code can be very confusing. Though we are not qualified to give individual tax advice, we encourage you to contact our office any time with questions pertaining to your specific situation and we will assist in any way we can!