social security disability question

[mblatour]

Hi, I have a question that I was hoping to get some help with. I have done quite a bit of research on my own (at IRS site, my books and such), and I do plan to call the IRS help line, but I thought I'd give this a try too.

This is my 2nd tax season as a certified preparer, and I admit, I have a lot to learn! My father-in-law (a very stubborn man who would normally never ask for advice, but did, and if I get the answer, he'll still say I'm wrong!) asked me a tax question in regards to his situation. These are the details I have, and I apologize if they are vague.

He's 56 years old and last year went onto disability (through his employer) due to bad knees. He told me that as of this year, his income is now through social security disability (about $1500 per month I believe). He also began to draw from his pension due to not affording his bills this past Spring. He has a pension through his past employer that he contributed to solely (he was a printing press operator for a union print shop). He said he's drawing about $1250 per month from that.

Question: Does he have to pay taxes on any of this income? He qualifies for the retirement due to the disability, but does the combo of the 2, make it taxable? As I've said, I've found a bunch of info. about it, but nothing specifically answers the question as it pertains to his exact situation. I have my beliefs, but as you know, that's not good enough. Any help you can provide (links?) would be greatly appreciated!

[dmj4]

Questions

Do you have software you can enter the information into, if you are not sure of the taxable amount?

Is he single? Does he have any dependents?

You will need to know when he began drawing his pension in the spring. You know how much he drew per month but how many months did he draw it? He paid it all in with no contributions from his employer but more than likely it is all taxable. However, there are some circumstances where it will not all be taxable.

When did he begin his Social Security disablility? Did he receive any payment for prior years? The amount he receives monthly may not be all that he received in 2005.

Based on the information you have given, it is possible that some of it could be taxable. He definitely needs to have it looked at, by you or someone else, after he gets his income statements in the mail.

I hope this has helped. I know it is vague, but with everything there are always many questions to ask to be certain. Especially, when there are no forms in front of you to verify the income amounts.

[Bees Knees]

Social Security disability is treated identical to regular Social Security benefits received for tax purposes. For a single person, none of it is taxable until one half of it plus all other income exceeds $25,000 for the year, or $32,000 in the case of Married Filing Joint.

For his pension income, assuming it is a defined benefit plan where he contributed after tax dollars to the plan, the taxable and non-taxable portion is calculated by dividing his cost basis in the pension (his after tax contributions) by a number which represents his life expectancy in months according to the simplified method for recovering the cost basis in a retirement plan (see TTB worksheet page 13-20). The result of this calculation represents the tax free return of cost per month for each pension distribution he receives during the year.

Sometimes, this non-taxable and taxable calculation is done by the payer and the results are listed on the 1099-R. I would suggest you wait until he gets a 1099-R from the payer of the pension to see what it says. If they left the taxable box blank, then you have to do the math.

[Sandytax]

Pension

I agree to wait for the statements to see what will have to be done. If his pension contribution was into a fund like a 401(k), it will be taxable since it was money that has never been taxed. Hopefullly the distribution code will be anything besides 1. A 1 is the code for early distribution before the age of 59 1/2. Since you will have documentation that he is disable and receiving disability social security then you will have to use the Form 5329 which deals with the 10% penalty that goes with the code 1. This is the way to cancel the 10% penalty.

[mblatour]

Thank you all for your responses. I did come across much of your guidance in my efforts to figure this out, but still am uncertain of the answer. I agree that waiting to see what comes and how it's marked is a good idea. I did contact the IRS help line the other day and spent 1 hour, 45 minutes on the line trying to get an answer (I timed it, because I am also a stay-at-home mom, and my 2 young boys really really wanted me to get off the phone). What the agent was able to tell me was that if my father-in-law didn't make an after-tax contribution on his pension income, that the income is fully taxable (knew that). And if he has a total combined income of the $25,000 (he is single), that there would be the 50% factor applying to the SS (knew that). But when it comes to the two together, she would not give me a direct answer. I need to get more information. I haven't even told my father-in-law that I've spent about 6 hours trying to get him an answer because he won't appreciate it (my in-laws had a very bitter divorce). I am more trying to get the answer because I want to learn it; but helping him would be a good thing too.

[Bees Knees]

The combo of the two may make it taxable, depending on how much of the pension is taxable.

For example, say his Social Security disability benefits are $18,000 for the year, and his union benefits are $15,000 for the year. Let’s also assume he has no interest income or any other income. Let’s also assume that he did not contribute any after tax contributions to the union plan, making 100% of the distributions taxable.

Using the taxable Social Security benefits worksheet (TTB page 16-9), 50% of Social Security plus 100% of his union pension add up to $24,000. Since this is less than $25,000, none of the Social Security disability benefits would be taxable.

Now change the numbers a little. Say his Social Security disability benefits are $20,000, his taxable union pension is $16,000. Again, using the worksheet, that would make $1,000 of his Social Security disability benefits taxable.

Change the numbers again. Say his Social Security disability benefits are $20,000 and union pension is $16,000, but $1,000 of the union pension is considered a return of his after tax contributions. Using the worksheet, he is back to none of his Social Security disability benefits being taxed.

Do you get the point? Throw in some taxable interest income, maybe some side job, and the percentage of taxable Social Security disability to non-taxable Social Security increases.