Taxed or not

[bekzm]

Ok - tax season is sort of over and the thinking cap is not as clear but here goes. A client got injured while on the job several years ago. Got a settlement and is on disability - RR at that. The settlement from what I am getting was rolled over into a traditional IRA and he has tradition IRA with the company Fidelity. The year 2008 which I am doing - he took a distribution which is coded 3 - disability and the box 2b taxable amount not determined and it is marked IRA. He is saying it should not be taxed because he is disabled and it was a settlement from getting hurt at work. I believe from what I am getting it should be. Any input on the situation would be helpful to be correct or incorrect to be taxed.
Summer is almost over.

[taxmom34]

did he get a 1099R when he got the settlement and on his return showed it as a rollover? i think it is taxable income.

[taxxcpa]

1099r

If he got a 1099R is would be retirement eligible for an IRA and if it went into an IRA the withdrawals would be taxable.
If he got it in some other manner, then it should not have been placed in an IRA.

Any withdrawal from an IRA other than a Roth or a non-deductible IRA is a taxable distribution. It is possible that it should have never gone into an IRA in the first place.

[DoNTaxesNow]

Settlements for physical injury or physical sickness are generally non-taxable. It appears that this money should not have been put into a traditional IRA....
Perhaps it can be taken back out as non-deductible contributions (non-taxable) if it can be shown that no deduction was taken when the money was put in the IRA. I have not researched how this would be done.... just a thought.

[bekzm]

Thanks

That is what I'm trying to find out but can't get answers. The injury was in 1997 so the money he got was for the settlement. What he did with all of it was what I'm trying to find out. My questions for him was the traditional IRA was from what - did he put into the IRA as a deduction or a nondeductable but does not know. The roll over into Fidelity - was it from the RR pension or what. Cannot get those answered. So I taxed it and he is complaining because he is disabled and it should not be taxed because I guess the form is saying it is #3 as a disability but it is also an IRA withdrawal. The CD's came due in 08 and in 09 there is hardly any interest. So I think the money went into CD's and then into IRA's - wow wish people would take better notes or keep track of it.

[DoNTaxesNow]

It sounds like the client wouldn't be able to prove that the distributions are non-taxable, so that only leaves you to conclude that they are taxable.
I'm sure he can't remember all the details of transactions over the years, and even if he could, the best memory is no substitute for good recordkeeping.
Maybe you could persuade him to find a new tax preparer...

[bekzm]

Thanks

True and taxed him on it and told him if can prove that it was not taxed - will amend but this is what I find and see so till proved different - then bring it on.

Thanks for input