Personal Finance (Not Investing) • Paid taxes (for years) on full USPS pension but shouldn't have...now what?

I just found my mother's 2014 tax return, with the completed Simplified Method Worksheet, and so I just learned my error. So what now?

If the tax benefit is worth the hassle, you should first decide if you're going to go back and amend the last three years of her tax returns.

You should decide this first because whether you amend her recently submitted returns will impact how you prepare her 2024 and onward returns.

On her 2024 tax return, do I just resume where things were left in 2014 with regards to the "balance of cost" to be recovered tax free? (I'm presuming that there's no way to make up for the lost years without filing amended returns, but I'd love to be mistaken about that. If by any chance I am, which IRS publication would confirm that?)

I believe you can, but it's not 100% clear.

If you amend the recent returns (see above), then the "balance of cost" will obviously be lower.

I base my opinion on IRS Pub 575, page 49, lines 6 and 10 which read:

"Enter any amounts previously recovered tax free in years after 1986."
"This is the amount you have recovered tax free through 2023."

-- https://www.irs.gov/pub/irs-pdf/p575.pdf page 49

Someone might argue that a more proper course is to go back and fill out the Simplified Worksheet for all those intervening years, which looks like it would result in your Mom losing out on the tax benefit permanently for those intervening years.

However, it seems fairly clear to me that the intent of the worksheet is to allow the taxpayer to receive a tax benefit from their after tax contributions, so "picking up where you left off" seems like a very reasonable position to take. I think the fact that you can take an itemized deduction for the remaining cost on her final return (see my comments on your next question below) bolsters my position.

In any case, the ideal situation would be that her 2014 tax preparer who was doing things correctly provided a worksheet with the return showing the remaining cost to be recovered. It sounds like they did.

Also, it seems certain that not all of my father's retirement contributions will be recovered tax free by the time that my mother dies (which could be any year now). By any chance, can all of the remaining amount be recovered on my mother's final tax return? (If so, in which IRS publication would I find confirmation of that?)

Yes, the unrecovered cost is an itemized deduction on Schedule A on her final return in the year she passes away.

You can confirm this in two places:

"Any unrecovered cost at your (or the last annuitant's) death is allowed as an itemized deduction on the final return of the decedent."

-- https://www.irs.gov/pub/irs-pdf/p575.pdf page 12 right column

"If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return."

-- https://www.irs.gov/publications/p529#e ... nk10004031

I believe it would be an Other Itemized Deduction on Schedule A line 16.

The amount of the non taxable amount should be equal for 25 years.

Generally true except the first and last year are typically different if the pension was started mid-year, which is the most common scenario.

Statistics: Posted by secondcor521 — Thu Jul 18, 2024 12:42 pm — Replies 7 — Views 1474

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