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1099-R for Qualified Loan Offset distribution for deceased spouse

Forum|Forum|5 years ago
August 29, 2020
14 replies
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Clients spouse passed away in May. Client received a 1099-R to the spouse (not to estate) for loan offset distribution in Thrift Savings Plan. Does the 1099 get filed on 1041 or 1040? Technically there is no estate as the spouse was the beneficiary of the TSP and all other assets were co-owned thus negating any kind of estate. Some CPA websites says to file with 1041 because the 1099 was created after death. In this case, since there is no estate, who pays the taxes? If filed on 1040, spouse would have to pay the taxes on loan that she was not legally liable for to begin with. The offset reduces the amount of the TSP account so in theory, the spouse is being penalized for the loan.

I've researched the IRS regs and various other areas, including some CPA input, but can not come up with clear concise direction. The IRS does not address this area specifically that I can find. Any input from someone with direct experience or knowledge of this situation would be greatly appreciated.

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Best answer by qbteachmt

You have probate, but state there is no estate. But probate is used to settle what is in an estate and outside of a beneficiary arrangement. So, you have an estate?

This isn't really worded correctly: "If filed on 1040, spouse would have to pay the taxes on loan that she was not legally liable for to begin with."

The Loan was from that account, which makes it hers, now. Date of settlement makes it hers, as the account became hers, when the transfer to the beneficiary was settled, because of his death.

If this 1040 is on extension, there still is time to rollover the amount of the loan offset for tax management purposes: "Effective January 1, 2018, if the plan loan offset is due to plan termination or severance from employment, instead of the usual 60-day rollover period, you have until the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs."

From: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans#2

Otherwise, the amount is considered to be a taxable distribution, which was settled to her.

T

TaxGuyBill

It probably doesn't really matter. 🙂

I would probably put it on the 1040.

@Love2Cruise wrote:
In this case, since there is no estate, who pays the taxes? If filed on 1040, spouse would have to pay the taxes on loan that she was not legally liable for to begin with. The offset reduces the amount of the TSP account so in theory, the spouse is being penalized for the loan.

If the spouse files a Joint return, the spouse is claiming responsibility for the amount owed. Otherwise, it would would come from his assets ... which would effectively mean it is coming from the spouse anyways.

L

Love2CruiseAuthor

Level 5

I see your point. The 1041 taxes the income at a higher rate. So amending and filing on the 1040 is a no-brainer, if it doesn't matter. I appreciate your input. Thanks much!

BobKamman

Level 15

@Love2Cruise "Technically there is no estate as the spouse was the beneficiary of the TSP and all other assets were co-owned thus negating any kind of estate."

For 1041 purposes, there can be and often is an estate. I would compare this to a situation I recently had, involving a decedent with about $10,000 in 1099-C cancellation of debt income. You wouldn't tax that to a beneficiary. I suspect your 1099-R was issued because the surviving spouse provided her SSN when a withdrawal was made from the TSP, either to her directly or to a rollover account. If you fought long and hard enough, a corrected 1099-R might be issued. But it's easier to report it on her 1040 as received, but not taxable.

If the 1041 is the right place to report the "income," it shouldn't be a question of who pays less tax. The tax would probably be less if the income were taxed to his 10-year-old granddaughter, but you can't do that either. But who is liable for paying the 1041 tax? Maybe IRS Collections could reach the joint assets in the widow's name, but that's a separate question involving federal and state law. And maybe the tax is less because there are deductions available on the 1041.

L

Love2CruiseAuthor

Level 5

So are you saying it should have been issued to the spouse when she rolled the inherited account over? The 1099-R was issued when the loan was essentially closed and treated as a distribution. But if the spouse indeed has to pay the tax on the distribution, it is to her benefit to file on amended 1040, as that's where the tax is less. There was a 1099-C issued for a credit card, which I agree with filing on the 1041.

There aren't any credible deductions to use on the 1040, unless I've overlooked something. There was no distribution of assets to any beneficiaries, other than the TSP. And the only deductible fees are the administrative fees for setting up probate, which was required to get two small accounts (less than $1500) transferred to the spouses name.

I really appreciate your input. Hate these type of scenarios.

qbteachmtAnswer

Level 15

You have probate, but state there is no estate. But probate is used to settle what is in an estate and outside of a beneficiary arrangement. So, you have an estate?

This isn't really worded correctly: "If filed on 1040, spouse would have to pay the taxes on loan that she was not legally liable for to begin with."

The Loan was from that account, which makes it hers, now. Date of settlement makes it hers, as the account became hers, when the transfer to the beneficiary was settled, because of his death.

If this 1040 is on extension, there still is time to rollover the amount of the loan offset for tax management purposes: "Effective January 1, 2018, if the plan loan offset is due to plan termination or severance from employment, instead of the usual 60-day rollover period, you have until the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs."

From: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans#2

Otherwise, the amount is considered to be a taxable distribution, which was settled to her.

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BobKamman

Level 15

For $725 a year you can subscribe to the ASPPA’s “ERISA Online Book” (EOB). I found this quote from someone who does:

From the EOB, "If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return."

Above from EOB Chapter 7, Section XIV Part I

qbteachmt

Level 15

Then it seems the 1099-R needs to be corrected.

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