1099R box 7 code 3

[Possi]

New client, husband just died last December. She has a 1099R for him, for NY disability income. Box 1 has roughly 17k, box 2 has nothing in it, and 2b says taxable amount is not determined. Box 7 is code 3, diability. There is almost 1k in federal withholding.

The ex-tax preparer who isn't doing taxes anymore and never took a tax class in her life, entered the 1099R just as it is, and did not subject this income to tax. Ever. For years.

I believe this is entirely taxable. He died at 75 years old and had been getting this money for many, many years.

Does anyone know more about this than me? It is NYC Employees' Retirement System. I'm confident he didn't pay for this insurance completely out of his own pocket, which would be the only way it would not be taxable....

Agreed?

I just re-read this, and it sounds broken and hard to understand, so do your best. It's how I talk...

[ddoshan]

Unless it is some special NY pension thing seems to me to be a NY retirement pension. Apparently started off as disability retirement, but now that he would most certainly have reached normal retirement age it would be entered as a typical pension. Are you sure that in the past this was never taxed. Seems unlikely this could go on for years without the IRS noticing at some point.
It is also possible that the pension needed to be entered using the simple or possibly general rule for pensions if the entire amount is not taxable. He may have some investment in the pension.

[Possi]

General Rule

Well, he received this for many years, and I do not know how long she did the tax return. I'll call her and see if I can find some more information.

[taxea]

I can tell you that my disability retirment from CA is tax free. I worked for a local government agency. She needs to call the issuer to determine whether his company employees have a contract that includes tax free disability.

[Burke]

New client, husband just died last December. She has a 1099R for him, for NY disability income. Box 1 has roughly 17k, box 2 has nothing in it, and 2b says taxable amount is not determined. Box 7 is code 3, diability. There is almost 1k in federal withholding.

I believe this is entirely taxable. He died at 75 years old and had been getting this money for many, many years. Agreed?

Yes it is taxable. See Pub 525, page 17. Should have been on Line 7 as wages if he retired prior to retirement age, and on Line 16 after that. It would not be taxable in NY, but it will be in VA if he lives in VA. Need to apply simplified pension rule to determine taxable amount if he has contributable basis in it.

[Possi]

Interesting

I'm glad you said that. Now I know there is a real possibility.

[Possi]

what a rat's nest

I do not think anyone has taxed this. I called the prior tax preparer and she said she used Block program and when she entered the number 3 in box 7, the program did not tax the income. Brilliant, right?

He is dead now. This is the only time I will have to deal with this. I hate like heck opening a rat's nest, but if I must...

[Burke]

You probably won't, but you have no choice. You have to do it right for this year. If there is no taxable income reported to the IRS for previous years, it probably has fallen through the cracks. You can advise the client what they should have done, and let the chips fall where they may. You cannot force them to file amended returns. But document.

I have a client who gets a regular pension (Code 7) from NYS Retirement system, but gross and taxable are the same and it shows EXEMPT in Box 12 (state tax). Box 5 says "0" (employee contributions) so it is fully taxable. Does your 1099 have anything in Box 5?

[Possi]

nothing in other boxes

No, there is nothing in the employee contributions box or anywhere else. That is another reason I can't do the Sim Gen Rule. It's just too far gone, and I agree. It's all taxable.

How does a tax preparer representing herself as a professional, deem over 17k as not taxable because her DIY program didn't tell her it WAS? And she is a nice lady, a friend of mine. This makes me sick. Sick. If the e-file requirement hadn't been put in place, she would still be doing this today.

[tpnl]

Continuation of benefits

Lets assume it was not taxable to the husband, but the wife continues to receive after his death, it is a continuation of benefits, so it is taxable to the wife. Non-taxable disability benefits are only tax free to the disabled person. He is dead, so it is now taxable to her.