1099-R Code 3 - Disability

[peggysioux]

Taxpayer received a 1099-R showing code 3, disability, and 1099-R marked taxable amount not determined. Taxpayer goes on to tell me that none of this income is taxable. I know that the penalty does not apply, but can't find anything showing me that income in non-taxable. Are there certain instances where income from a pension plan is not taxable due to disability?

[Y2KEA]

The trustee has no idea as to taxability of the IRA. Unless the TP has basis, I would say it is all taxable W/O penalty.

[ChEAr$]

The trustee has no idea as to taxability of the IRA. Unless the TP has basis, I would say it is all taxable W/O penalty.

What IRA? I dinna see that in the OP.

However, if the income is on a 1099r it's taxable. Period. No matter what client or ex client says.

[BP.]

No matter what client or ex client says.

omg- you are funny!

[taxea]

I don't understand why the issuer of the 1099 doesn't know whether or not it is taxable.
I can tell you that I receive a 3 1099 and it is not taxable. I can only tell you about CA.

Some (PERS) State and C&C law enforcement employees that were hired prior to 1980 and retire on a disability receive a non-taxable disability. I my case the monies that funded my regular retirement were automatically turned into an annuity. This distribution amount is in box 2. This distribution is taxable. The disability benefits that I get are not taxable at all and the annuity is only 1/6th of my retirement pay.

California Highway Patrol has their own retirement system, as do several CA Sheriff's departments.

Your client needs to determine this for you because it depends on where TP gets the retirement benefit from. Other disability retirements are fully taxable unless the TP contributed to the fund.

[David1980]

If the issuer knows whether it's taxable or not and the amount, it seems very poor form to mark the "taxable amount not known" checkbox and omit the taxable amount.

Either they know it or they don't. My guess is far more 1099-R's get "assumed" to be non-taxable. I can't even remember how many 1099-R from OPM I've seen in clients prior year returns where whoever did the return simply failed to do the simplified method worksheet. I know in the software I use, if I fail to do that worksheet it looks like it's not taxable. So I can see how a lot of people could assume these are non-taxable because entering it just like the form without filling in the simplified method worksheet or doing something to try to calculate the taxable amount they end up a return that shows no taxable amount and they think it is correct.

I know there are a lot that will continue to preparer the OPM pensions that way as I try to preparer taxes and try not to educate taxpayers. I do answer questions, but try not to tell them their prior accountant is dumb or anything like that. So I get a proper prepared return and they seem to accept it, but not return the following year. No doubt going back to someone willing to treat their OPM as a non-taxable distribution.

[Burke]

Taxpayer received a 1099-R showing code 3, disability, and 1099-R marked taxable amount not determined. Taxpayer goes on to tell me that none of this income is taxable. I know that the penalty does not apply, but can't find anything showing me that income in non-taxable. Are there certain instances where income from a pension plan is not taxable due to disability?

This type of 1099R is issued from an employer's pension plan when the person retires early on disability. It's code 3 until normal retirement age, then code 7 after that. While code 3, it is treated as wages and goes on Line 7 of 1040. Generally, when the amount taxable box is not completed, you must do the simplified pension worksheet to determine the excludable amount. The employee contributions should be shown on the 1099R in Box 5 which is what you use to do this calculation, along with age it started, etc, etc.

[ChEAr$]

It's not unusual to see the tax amt not determined block checked.

Many times the payors, by this time third party payors like State Street in chicago, Merrill Lynch, Bank of America, etc, have no idea as to retired employee's
contribution into the system.

[peggysioux]

1099R with Code 3

Taxpayer does reside in CA and was a fireman who is now retired with disability. But he is only 45 so would not have been hired prior to 1980. If 1099-R income that shows code 3 needs to go on line 7, then does he need to pay SE tax? There is no amount showing in box 5 to figure the simplified method. I think I am even more confused.....any clarification for my slow brain today would be appreciated!

[Burke]

If there is no amount in Box 5, then it appears he may not have contributed to this plan. Ask him. If he did not, it is fully taxable. It goes on line 7, but it is not subject to SE tax. It is treated like sick pay.

[New York Enrolled Agent]

Peggysioux

I believe that with most questions regarding taxes, the answer is "it depends".

You note the client is a retired fireman.

I do tax returns for a number of NYC retired firefighters who receive 1099 forms with a code of 3. Contrary to some posts, there is no one-size-fits-all answer. Some are taxable - some are not. What's the difference? The nature of the disability.

If a fireman is off the job and is in a car accident and injures his legs, he may be unable to fully serve as a fireman and be forced to retire due to a physical disabilty UNRELATED to service in his job. That pension with code 3 would be taxable. On the other hand, the firefighter might injure his legs while fighting a fire or in an accident responding to a fire. The disability from a JOB RELATED injury will lead to a disability retirement with a code of 3 that serves as a replacement for workers compensation and will not be taxable.

You need to ask your client what led to his disabilty retirement? Job related or not? I think the answer to that question will help you make the determination of taxable or non-taxable.

[taxea]

In order to do the calculate as to taxability you also need the answers to the lines at the bottom of the 1099...these should be available on the statement he received when he retired.
This will tell you whether he made any contributions into the account.

I hate box 5 because one never knows which of the three items listed there is being referred to.

Just because the issuer didn't figure the taxable amount does not mean they cannot provide the information necessary for you to figure it.

The only other question before doing all this work is: Is the disability taxable?