Discussion Archives:DISABLED UNDER RETIREMENT AGE WANTS IRA

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Discussion Forum Index --> Advanced Tax Questions --> DISABLED UNDER RETIREMENT AGE WANTS IRA


Discussion Forum Index --> Tax Questions --> DISABLED UNDER RETIREMENT AGE WANTS IRA

MRBARRYTAX (talk|edits) said:

6 April 2008
My client has received a form 1099R, gross distribution $20,000 (box 1), as well as Box 2a, taxable portion,.. Distribution code is "3" which is disabled. AND HE IS UNDER THE MINIMUM RETIREMENT AGE. Following back of Form 1099R, the distribution should be placed under wages, salary on the tax form, i.e, Box 7. I have inputed an IRA for $4,000 and it works. Therefore, am i correct to believe that he is eligible for IRA since income is considered wages until he reaches normal retirement age.

Kevinh5 (talk|edits) said:

6 April 2008
NO

MRBARRYTAX (talk|edits) said:

7 April 2008
Can i please have source of the decision, since publication on pensions ,as well as, back directions of form 1099-R indicate placing this on line 7, of form 1040.

Kevinh5 (talk|edits) said:

7 April 2008
The source is 20 years of experience and many many many years of tax education. The instructions are wrong. This is NOT earned income. If you want to read about IRAs, look at IRC §72.

MRBARRYTAX (talk|edits) said:

7 April 2008
Please realize that reviewing Pub 590, pub 575 and Pub 524 the correct term used is taxable compensation, which includes wages, bonuses, etc ,NOT EARNED INCOME. but pension and annuity income, as well as scholarships reported on line 7 are excluded. Furthermore, only W-2 wages appearing in Box 1 are the determinants for possible IRA deductions. The instructions happen to be correct since disability pension income (under retirement age) and certain scholarships, and 1099's should appear on Line 7, Form 1040.

Scottycoyote (talk|edits) said:

7 April 2008
could you possibly be getting the instructions for the 1099r box 7 mixed up with line 7 of the 1040? I noticed you used the word "box 7" in your original post.

there might be some odd situations where your 1099r distributions is reported on line 7 of your 1040 but i cant recall ever having it happen.

TaxFlake (talk|edits) said:

7 April 2008
I have to believe that it is a determining factor for IRA contributions. Sorry, too tired for me to provide source, but the underlying premise for this is the fact that if the person did not become disabled, he/she would be working and would qualify. On a side issue, this type of situation also leads to qualifying income for EIC if client also meets income/dependent tests. In my past dealing with these two issues, I have also enclosed a statement with the return that states that client is disabled, is under the minimum retirement age, has included the disability pension on line 7, and has used this as basis for IRA, or EIC purposes, as the case warranted. My longest term client under these rules has been with me over eight years and we have not yet been challenged by IRS on this issue. That's not to say I'm totally at ease with this, just my experiences.

Trillium (talk|edits) said:

7 April 2008
Pull out pub 590 again. Look at table 1-1, in the box on pg 8. Compensation, for purposes of an IRA, does NOT include pension or annuity income.

PaperworkCPA (talk|edits) said:

7 April 2008
How about section 219(f)(1)?

Compensation. For purposes of this section , the term “compensation” includes earned income (as defined in section 401(c)(2) ). The term “compensation” does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. The term “compensation” shall include any amount includible in the individual's gross income under section 71 with respect to a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) . For purposes of this paragraph, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6) .

TaxFlake (talk|edits) said:

7 April 2008
"You report your taxable payments 'As Wages' on line 7 of form 1040...until you reach minimum retirement age" pg 5 Pub 575.

Therefore, if it is reported 'As Wages', it is no longer considered to be pension monies.

TaxFlake (talk|edits) said:

7 April 2008
Last note for me tonight.

Code 3 in box 7 changes the term 'Pension' to the super-term of "Disability Pension." :P They both mean income, but they are most certainly reported on different lines, with differing consequences, until age of minimum retirement comes along and joins them back together.

KatieJ (talk|edits) said:

7 April 2008
TaxFlake, I don't see how your quotation from Pub 575 has anything to do with this issue. The question is what constitutes "compensation" for purposes of IRC Sec. 219. What line an income item is reported on has nothing to do with it.

Sec. 219(f)(1), quoted by Paperwork, clearly excludes pensions and annuities from the definition of "compensation" for this purpose. It doesn't say anything about "disability pensions" or "minimum retirement age." Reg. Sec. 1.72-1(b) defines "amounts received as an annuity" as "amounts which are payable at regular intervals over a period of more than one full year from the date on which they are deemed to begin, provided the total of the amounts so payable or the period for which they are to be paid can be determined as of that date." If Mrbarry's client's payments meet that definition, they constitute an annuity, which does not qualify as compensation under Sec. 219. Also, see PLR 8331069, in which disability payments received by a taxpayer under minimum retirement age were held not to constitute compensation for purposes of IRA contributions.

IRS publications are helpful information, but they are not authority for anything. If a publication leads you astray, you may not be penalized but you're still subject to the tax.

David19080 (talk|edits) said:

7 April 2008
Simply existing on line 7 of the 1040 isn't enough for it to be a qualifying income. Take scholarships for example. I've had clients who had taxable scholarships that I was unable to completely eliminate the taxable portion of and those go to line 7. Yet the Pub 590 specifies that the only scholarships allowed to apply for IRAs are scholarships received in box 1 of a W-2. So despite it ending up on the same line, that alone is not enough to change it.

That doesn't mean it isn't qualifying income, just that you'd have to have something more than "It goes to line 7" to show why. For EIC, it's specifically covered in Pub 596 so there's no question on the EIC side of it.

MRBARRYTAX (talk|edits) said:

7 April 2008
Thank you for the detailed discussion of this issue. As we see even experts have varying opinions as to tax law since many times gray areas are apparent. I will be checking PLR8331069

but my decisiion NOT to go forward with the IRA deduction is clear. Thanks again. Happy returns

RoyDaleOne (talk|edits) said:

7 April 2008
(f) OTHER DEFINITIONS AND SPECIAL RULES
    (1) COMPENSATION 
 
    For purposes of this section, the term "compensation" includes earned 
    income (as defined in section 401(c)(2)). The term "compensation" 
    does not include any amount received as a pension or annuity and does 
    not include any amount received as deferred compensation. The term 
    "compensation" shall include any amount includible in the 
    individual's gross income under section 71 with respect to a divorce 
    or separation instrument described in subparagraph (A) of section 
    71(b)(2). For purposes of this paragraph, section 401(c)(2) shall be 
    applied as if the term trade or business for purposes of section 1402 
    included service described in subsection (c)(6).

Kevinh5 (talk|edits) said:

7 April 2008
MrBarry, you are forgetting Sch C net income as earned income. And I use the term correctly. In spite of what the pubs say. Anyone relying on the pubs has a long road ahead of him.

Riley2 (talk|edits) said:

7 April 2008
PLR 8331069 held that the disability benefits paid by the company retirement plan constitute FICA wages, but not compensation for IRA purposes. If you subscribe to the logic contained in 8331069, the DI benefits should not be treated as compensation.

However, under Reg. 1.219-1(c)(1), compensation includes remuneration for services actually rendered. I believe that the disability payments are received for services actually rendered. Thus, I see no reason not to treat the amount on the 1099R as compensation for IRA purposes. For example, if the disability income had been paid by the employer directly, the income would be reported in box 1 of the W-2 form, making it “compensation.”

With all due respect to the Internal Revenue Service, I fail to see how FICA wages are not compensation for IRA purposes.

Kevinh5 (talk|edits) said:

7 April 2008
Riley, we don't really know whether these are 'disability payments' or just a withdrawal from a plan or IRA which would be subject to the 10% additional tax if he weren't disabled. The code '3' may just be the clue as to what to put on the 5329.

Riley2 (talk|edits) said:

7 April 2008
Kevin, you are absolutely correct. Mr. Barry never said that this was a monthly payment from a company pension plan. I would agree that if this was merely a distribution from an IRA or if it was a lump-sum distribution, my conclusion would be different.

JR1 (talk|edits) said:

April 7, 2008
Riley's back! Welcome back! We've missed you.

MRBARRYTAX (talk|edits) said:

8 April 2008
the 1099R is for a disabled teacher, who has not attained the minimum retirement age (i.e., 55 years of age)and i would regard this NOT eligible for IRA purposes. Furthermore, this disability is not job-related, so it would be far-fetched to allow IRA deductions in scenarios such as this.

Kevinh5 (talk|edits) said:

11 April 2008
would you please cite the publication or code source of your your decision?

TaxFlake (talk|edits) said:

11 April 2008
Maybe we should just take the cumulative results of all the various tax progams we use.

If it is unamimous among all the programs, then we can cite this for our basis, after all, could all the programs be wrong?!

TaxAct votes yes!

Kevinh5 (talk|edits) said:

11 April 2008
tax software is no substitute for a good tax professional

TaxFlake (talk|edits) said:

12 April 2008
Kev, man, you gotta smile once in awhile on these blogs:) As for me, I find myself smiling a lot these days, mostly about nothing, I'm kinda a little bit worried about it..........the smiling I mean............scares the bejeebers out of me.................LOL

Nancyshoemake (talk|edits) said:

12 April 2008
gotta just love him....
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