You have a salary deferral to a qualified pension plan, such as a 401(k) plan, and then for some reason, you have over contributed. This could be due to having more than one 401(k) plan or being caught by the highly compensated individual rules. But, whatever the case is, the excess deferral is being returned. The excess deferral is for the 2006 tax year, but the deferral plus any earnings on the deferred amount is being returned in 2007 by April 16.

The excess deferral, PLUS EARNINGS, will be returned in 2007 by April 16. Two Forms 1099-R will be issued and they will be 2007 Forms.

One will be issued with only the excess deferred amount in box 1 and box 2a and will have code P in box 7, meaning that the distribution is to be reported on the 2006 (prior year) tax return.

The second Form 1099-R will be for the earnings, will have only the earnings in box 1 and box 2a, and will have code 8 in box 7. It may also have a code 1 in addition to the code 8 indicating an early distribution subject to the 10% penalty for an early withdrawal. The person may not receive these 1099-R Forms until January, 2008.

Here is what you need to know.
You need to know the breakdown of the amount returned, namely, how much represents the excess deferral and how much represents the earnings.

Here is what to do.
Enter the W-2 Forms just as they are.

Enter the Form 1099-R with the code P in box 7. If this Form 1099-R has been received, then enter it just like it is on the one received. If this Form 1099-R has not been received, then enter the amount of the excess deferral, not including the earnings, in box 1 and in box 2a. Enter code P in box 7. Note that the drop down list for box 7 shows code P means taxable in 2005. THAT IS OK. It really means taxable in the prior year. On the Form 1099-R, check the box on line A5 to indicate that this is a 2007 Form 1099-R. In the interview, a screen will appear asking if this is a 2006 or 2007 Form 1099-R. Select 2007. The deferral will appear on line 7 of the Form 1040. Entering the Form 1099-R this way prevents the necessity of amending the 2006 tax return in 2007 when the 2007 Form 1099-R is received.

The other Form 1099-R, the one with the code 8 in box 7, is for the earnings and is entered into the 2007 tax return, not the 2006 tax return. Do not enter this one. Enter it on the 2007 tax return.

Now, on the interview, follow these steps: 

1. Select Federal Taxes tab
2. Select Income tab
3. Click on Select Specific Topics
4. Scroll down to Other Income
5. Click on Start or Revisit button next to Other Income

On the Indicate any Other Income Items screen, there is a check box for Wages not already reported. If this is checked, there will be a screen asking "Any Wages Not Reported?" If "Excess salary deferrals" is the only item that applies, click "No". If another item applies, click "Yes", but DO NOT enter any excess salary deferral amounts. Do not enter any excess salary deferral amounts on the Wages, Salaries, & Tips Worksheet.

The excess deferral, LESS ANY LOSS, will be returned in 2007 by April 16.

One Form 1099-R will be issued and it will be a 2007 Form. It will be issued with the excess deferred amount less the loss in box 1 and box 2a and will have code P in box 7, meaning that the distribution is to be reported on the 2006 (prior year) tax return. The person may not receive this 1099-R Form until January, 2008.

Here is what you need to know.

You need to know the amount of the loss, namely, the total excess deferred amount and the amount of the loss. The Form 1099-R will show the net amount returned, that is, the excess deferral amount less the loss.

Here is what to do.
Enter the W-2 Forms just as they are.

Enter the Form 1099-R with the code P in box 7. If this Form 1099-R has been received, then enter it just like it is on the one received. If this Form 1099-R has not been received, then enter the amount of the excess deferral, less the amount of the loss, in box 1 and in box 2a. Enter code P in box 7. Note that the drop down list for box 7 shows code P means taxable in 2005. THAT IS OK. It really means taxable in the prior year. On the Form 1099-R, check the box on line A5 to indicate that this is a 2007 Form 1099-R. In the interview, a screen will appear asking if this is a 2006 or 2007 Form 1099-R. Select 2007. The deferral will appear on line 7 of the Form 1040. Entering the Form 1099-R this way prevents the necessity of amending the 2006 tax return in 2007 when the 2007 Form 1099-R is received.

Now, in the interview, follow these steps: 

1. Select Federal Taxes tab
2. Select Income tab
3. Click on Select Specific Topics
4. Scroll down to Other Income
5. Click on Start or Revisit button next to Other Income

On the Indicate any Other Income Items screen, check the box "Wages not already reported". There will be a screen asking "Any Wages Not Reported?"  Click "Yes" on this screen. Note one of the examples listed is Excess salary deferrals.  Continue to the screen called "Other Earned Income". On this screen, enter the description "Excess Salary Deferral" and the amount of the loss only. This entry goes on line 9 of the Wages, Salaries, & Tips Worksheet. It gets added to the amount on the Form 1099-R and flows to line 7 of the Form 1040. In this way, the total amount of the excess deferral is added to line 7 of the Form 1040.

The loss can be claimed on the 2007 tax return. The loss amount only is entered on the Other Income Statement, line 17 (Other taxable income), as a negative number. The loss is "Loss on Excess Deferral Distribution".

In this case, the excess deferral amount is taxable in both 2006 and 2007. The earnings are taxable in 2006.
The excess deferral, PLUS EARNINGS, will be returned in 2007 after April 16. Two, possibly three, Forms 1099-R will be issued and they will be 2007 Forms.

One will be issued with only the excess deferred amount in box 1 and box 2a and will have code P in box 7, meaning that the distribution is to be reported on the 2006 (prior year) tax return.

The second Form 1099-R will be issued with only the excess deferred amount in box 1 and box 2a and will have code 8 in box 7.

The third Form 1099-R will be for the earnings, will have only the earnings in box 1 and box 2a, and will have code 8 in box 7. It may also have a code 1 in addition to the code 8 indicating an early distribution subject to the 10% penalty for an early withdrawal. The person may not receive these 1099-R Forms until January, 2008.

Note:  The second and third Form 1099-R may be combined into one since they each have a code 8 in box 7.

Here is what you need to know.

You need to know the breakdown of the amount returned, namely, how much represents the excess deferral and how much represents the earnings.

Here is what to do.
Enter the W-2 Forms just as they are.

Enter the Form 1099-R with the code P in box 7. If this Form 1099-R has been received, then enter it just like it is on the one received. If this Form 1099-R has not been received, then enter the amount of the excess deferral, not including the earnings, in box 1 and in box 2a. Enter code P in box 7. Note that the drop down list for box 7 shows code P means taxable in 2005. THAT IS OK. It really means taxable in the prior year. On the Form 1099-R, check the box on line A5 to indicate that this is a 2007 Form 1099-R. In the interview, a screen will appear asking if this is a 2006 or 2007 Form 1099-R. Select 2007. The deferral will appear on line 7 of the Form 1040. Entering the Form 1099-R this way prevents the necessity of amending the 2006 tax return in 2007 when the 2007 Form 1099-R is received.

The other Forms 1099-R, the ones with the code 8 in box 7, are for the earnings and are entered into the 2007 tax return, not the 2006 tax return. Do not enter these. Enter them on the 2007 tax return.

Now, in the Interview,follow these steps: 

1. Select Federal Taxes tab
2. Select Income tab
3. Click on Select Specific Topics
4. Scroll down to Other Income
5. Click on Start or Revisit button next to Other Income

On the Indicate any Other Income Items screen, there is a check box for Wages not already reported. If this is checked, there will be a screen asking "Any Wages Not Reported?" If "Excess salary deferrals" is the only item that applies, click "No". If another item applies, click "Yes", but DO NOT enter any excess salary deferral amounts. Do not enter any excess salary deferral amounts on the Wages, Salaries, & Tips Worksheet.