IRAs and Pensions: Total? Taxable? Cash? Recurring? Gross it up?

Your question:

I was given your name as an expert in tax returns. I have a question regarding 15a and 15b, as well as 16a and 16b. Will there ever be amounts in both 15a and 15b that are different? If so, which number do you use for cash flow determination? Same thing for 16a and 16b.

Linda says:

I suppose I could have edi

What is the difference?

Line 15a and 16a…and 20a for that matter…are for the total amount of IRA, Pension or Social Security distributions. 15b, 16b and 20b are the taxable amounts.

Which do you use?

Assuming it is cash and is recurring, you want to give them credit for the full amount received. If you use the AGI Method of 1040 analysis, you have started with AGI and already have the taxable portion, just subtract b from a to get the untaxed portion which you will add to cashflow.

If you use the Schedule Analysis Method where you start with a blank worksheet and enter what you want to use, enter 15a, 16a or 20a.

Is it cash?

An IRA or Pension rollover, if sent to the taxpayer prior to being rolled into a qualified plan, will be reported on 15a or 16a even though they do not keep the cash. Often, tax software will ‘type’ in the word ‘rollover’ to the left of the line.

Is it recurring?

Before you assume distributions are continuing, compare several years. Another hint: look for the line on page two of the 1040 for ‘Additional tax on IRAs, other qualified retirement plans, etc’. (I’d give you the line number but they keep changing it. It is usually around 58 or 59). One of the ‘additional taxes’ is a penalty on early withdrawal. Of course, they are penalized if the take too much or contribute too much so take a look at the 5329.

Do you ‘gross up’ nontaxed income?

If you use debt-to-income ratio on personal cashflow to determine credit-worthiness, you may need to ‘gross up’ the nontaxed portion. This is commonly done to bring the nontaxed portion in at its taxable equivalent.

AGI method: Line 15a/16a X 1.25 assumes a 20% tax bracket. Your financial institution might use a different factor, may only do it when needed to qualify, or may use it only as a compensating factor.

Schedule Analysis method: This is trickier. First calculate the nontaxed portion as 15a/16a minus 15b/16b. Multiply this nontaxed portion by 1.25 (or your factor). Then add that new number to 15b/16b.

And you thought this was an easy one!

My manual on ‘Tax Return Analysis: Essentials and 1040 Review’ includes more on the cashflow treatment of non-business income. Here it is!

Download the Global Tax Return Analysis
Quick Reference Guide