Making Work Pay Credit - 3rd Party Sick Pay

[Larmil]

Does 3rd party sick pay qualify for the Making Work Pay Credit? It is on a W-2, but it is not earned income.

[Gretel]

I just did some research on this. It appears that it can be assumed that these disability payments that are reported on a W-2 are always disability payment before the regular retirement age.

For IRA and EITC purposes, this is considered earned income and I don't see anything in the requirements for this credit that says differently. It boggled my mind too. Guess just an unintended loophole or maybe some logic behind this.

Some of the real "good seasoned" posters are good with explaining logic if there is any.

[Koss]

Disability Benefits

Not all disability benefits reported on Form W-2 are considered earned income.

Some benefits are, while some are not. If it is reported on Form W-2 with Code J, then it is not treated as earned income.

See page 244 of Publication 17 (2009), for a discussion of disability benefits with respect to the earned income credit.

I've seen at least one case where disability benefits from a state retirement plan were reported on Form 1099-R, but were still considered earned income, because the person was retired on disability, and had not yet reached retirement age...

Those codes are extremely important.

BMK

[Gretel]

Not all disability benefits reported on Form W-2 are considered earned income.

Some benefits are, while some are not. If it is reported on Form W-2 with Code J, then it is not treated as earned income.

See page 244 of Publication 17 (2009), for a discussion of disability benefits with respect to the earned income credit.

I've seen at least one case where disability benefits from a state retirement plan were reported on Form 1099-R, but were still considered earned income, because the person was retired on disability, and had not yet reached retirement age...

Those codes are extremely important.

BMK

Thank you for the clarification. However, code "J" payments are not - or should not - be reported in box 1. This is all that was important to me for my specific situation. I am so glad you posted since it taught me again to be more careful and precise in what I say. My conclusion do not necessarily fit what someone else needs.

[Larmil]

Thanks

Thank you both for the info.

[Black Bart]

Code J

Thank you for the clarification. However, code "J" payments are not - or should not - be reported in box 1. This is all that was important to me for my specific situation. I am so glad you posted since it taught me again to be more careful and precise in what I say. My conclusion do not necessarily fit what someone else needs.

I got a W-2 in yesterday with no wage figures anywhere. All that was on it was a code "J" for $2,350 in box 12a of the W-2 and the "Third-party sick pay" in Box 13 was checked.

Didn't know what to do with it, so I looked at the code chart on back of the W-2 and it said "J - Nontaxable sick pay (information only, not included in boxes 1,3, or 5)". So I didn't do anything with it.

This doesn't answer Larmil's question, but I thought it might be of interest since it concerned code J.

[taxea]

Here's another one for you...
Client had a brain injury at age 46. He had been paying into long term disability. His W-2 is issued through an insurance company with his employer info in the usual payor box.
Box one shows the "other compensation"; box 13 is marked third-party sick pay; box 12 is J with an amount of 500. more than box 1.

I'm thinking the long term disability insurance may be the reason for the boxes that are used.

[Burke]

retired on disability[/i], and had not yet reached retirement age...BMK

I have a number of these. They go on Line 7 until the disabled person reaches normal retirement age (should be a Code 3 on 1099-R). Then, at that time it changes to a Code 7 -- normal retirement -- to line 16. I guess it is because the state pays the disability premium? Or self-insures, or whatever. Sure would be simpler if they just issed a W-2 until it was actually treated as retirement.

[Bonnie]

W-2 with different amounts in box 1 and 12

I have a W-2 for third party sick pay and in box 1 is 7422. Box 12 has a J with 0 as the amount. So how do I treat this? I would understand if the J in box 12 also had the same amount as box 1. Not sure how to handle this one. thanks for any help.