DFAS 1099-R and EIC

[nwtaxlady]

My client has NO wages for 2012. He has a Military retirement from a disability. He was injured and so receives his retirement due to disability. He is 30 years old and has children. Again, NO wages. His 1099-R from DFAS of $17,500 is coded 7. So my question is.... does this go to line 7 as wages since he is only 30? If I keep it coded 7 and treat it as a regular retirement, then he gets NO EIC. But if I put it as line 7 since "due to disability under the normal retirement age" then he gets EIC on his 3 children on his MFJ return.

I am confused on how to treat this DFAS 1099-R since it is coded 7 and there is EIC involved.

I would appreciate any advise.
Thanks

[taxea]

Does a taxable amount show in box 2? Check either the 1099 R instructions and/or the Publication for Military.

[WhiteOleander]

My client has NO wages for 2012. He has a Military retirement from a disability. He was injured and so receives his retirement due to disability. He is 30 years old and has children. Again, NO wages. His 1099-R from DFAS of $17,500 is coded 7. So my question is.... does this go to line 7 as wages since he is only 30? If I keep it coded 7 and treat it as a regular retirement, then he gets NO EIC. But if I put it as line 7 since "due to disability under the normal retirement age" then he gets EIC on his 3 children on his MFJ return.

I am confused on how to treat this DFAS 1099-R since it is coded 7 and there is EIC involved.

I would appreciate any advise.
Thanks

The problem is that the military coded it a 7, normal retirement instead of 3 disability. I'm not sure that you can decide to put the distribution on line 7 w/o getting the 1099R changed.

[taxea]

I believe the IRS allows correction on 1099's but not on W2. I would be sure that it was not a taxable disability though.

[jimenright]

Not earned income

Disability pay is not considered earned income for purposes of the Earned Income Credit. See The Tax Book Pg 11.6.
The 1099R is treated in the normal way. The amounts do not go on line 7.

[BP.]

From the EIC section of Pub 17, p. 232, top right:

http://www.irs.gov/pub/irs-pdf/p17.pdf

"Disability Benefits

If you retired on disability, taxable benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. Minimum retirement age generally is the earliest age at which you could have received a pension or annuity if you were not disabled.

You must report your taxable disability payments on line 7 of either Form 1040 or Form 1040A until you reach minimum retirement age.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension and are not considered earned income. Report taxable pension payments on Form 1040, lines 16a and 16b."

(My TTB copy on p. 11-6 discusses the Child Care Credit. TTB 11-9 discusses EIC and has similar language as quoted above.)

I do have a client who's been receiving disability income and EIC for several years, though non-military and on a W-2.

[Bonnie]

I think the key is which form is issued. Someone not military on disability will receive a W-2 with box 13 coded 3 which then puts the disability on line 7 and includes it in income. I think with the military it is considered retirement pay regardless of the age and whether it is voluntary retirement or in the case of this taxpayer a forced retirement due to a disability. I have never seen the military issue a W-2 in such a scenerio.

[ddoshan]

I think the key is which form is issued. Someone not military on disability will receive a W-2 with box 13 coded 3 which then puts the disability on line 7 and includes it in income.

Actually it is fairly common to see folks who retire from a company due to disability to get 1099R's coded 7. Then as indicated above, if the person has not reached minimum retirement age the amount should be entered on line 7 wages.

[Burke]

Civil Service (Office of Personnel Mgmt) issues 1099-R's to former employees who retire on disability and they code them a 3. They are treated as wages. After they reach normal retirement age, it is supposed to be changed to a Code 7. However, I have a client who still gets his 1099R coded a 3, and he is now 72 years old. It went on Line 7 as wages when it began, but now it goes on Line 16 as retirement pay. The military should be the same, I would think. But I cannot give you a cite or any personal experience with Armed Forces disability pay. Wouldn't the TP get VA benefits which are not taxable for the disability? Those who are receiving a W-2 coded 3 are usually because the former employer had a disability plan with an insurance company, who is now paying those benefits.