1099R - Disability

[LCP]

Taxpayer leaves job with the city due to disability and begins receiving benefits. I'm sure there are union contract issues involved too.

The 1099R says taxability is not determined and box 2 is blank.

I thought the rules was relatively simple ....... if you paid for the related insurance contract with after tax dollars it is tax free. If with pre-taxed dollars or is a benefit proveded by your employer it is taxable.

The Master Tax Guide has me quite confused ...... lots of examples of tax-free treatment and very little specificity on when it is taxable.

[Armando Beaujolais]

Taxpayer leaves job with the city due to disability and begins receiving benefits. I'm sure there are union contract issues involved too.

The 1099R says taxability is not determined and box 2 is blank.

I thought the rules was relatively simple ....... if you paid for the related insurance contract with after tax dollars it is tax free. If with pre-taxed dollars or is a benefit proveded by your employer it is taxable.

The Master Tax Guide has me quite confused ...... lots of examples of tax-free treatment and very little specificity on when it is taxable.

The rules are straightforward. You just have to find out how the premiums were paid. Ask the client for a check stub. That should show whether amounts were taken out pre-tax for the disability policy.

However, there is some complication if part of the policy was paid pre-tax and part was after-tax. It's not uncommon for an employer to pay pre-tax disability premiums, and the employees are allowed to pick up additional coverage with after-tax dollars. Perhaps that's what happened here and the issuer is putting the problem of calculatino into the tax preparer's lap.

If that's the case, don't just allocate the taxable amount pro-rata. The most expensive part of a disability policy is the first dollars. Picking up additional coverage is much less expensive than the base coverage. Allocate the taxable amount based on the amount of coverage the after-tax dollars purchased, not the percentage of after-tax dollars compared to pre-tax dollars. It's a big difference.

[LCP]

Maybe not always so straightforward................

Apparently Rev Rul 72-44, 72-45 and 72-136 provide for non-taxable disability when paid to police or firemen as long as it isn't based on years of service.

Anybody familiar?