Can “Employee” on Disabiluty make tax deductible IRA contribution
Client is on disability from employer who has a 401k available, but not to her any longer b/c of her disabled status. Can she make a tax deductible IRA contribution?
Client is on disability from employer who has a 401k available, but not to her any longer b/c of her disabled status. Can she make a tax deductible IRA contribution?
Permalink Submitted by Alan - IRA critic on Mon, 2013-09-09 18:22
Is client married and filing jointly? Is the disability income reported on a W-2 or a 1099R for 2013?
Permalink Submitted by tomd37 on Mon, 2013-09-09 19:49
Disability income may be considered as “earned income” if reported on 1099R with a code 3 (disability) in box 7. I believe, as such, that would qualify the taxpayer for a reduction to income when used to fund a traditional IRA. I think Alan alludes to a similar reduction to income if the taxpayer is married and filing jointly if the other spouse has earned income thus qualifying the OP for a contribution.Tom D.
Permalink Submitted by Alan - IRA critic on Mon, 2013-09-09 21:36
Actually, disability income is considered earned income for IRA contribution purposes if reported on Form W-2. If reported on a 1099R it is considered retirement income and therefore NOT earned income. So if client can first make a contribution, then the other factors come into play in determining whether it can be deducted or not. Spousal IRA contribution options also apply here.
Permalink Submitted by tomd37 on Mon, 2013-09-09 22:46
Alan,Please help me understand a bit more about the 1099-R form. As I interpret the instructions for the form, a code 3 in box 7 is the distribution code for disability pension payment. Form 1040 line instructions for lines 16a and 16b says do not include disability pension payments on these lines, but rather report them on line 7 as wages, salaries, and tips. I know in the AARP Tax-Aide program when we have a disabled taxpayer under the company’s normal retirement age that receives a 1099-R with code 3 in box 7, we enter the info on the 1099-R screen, but there is a separate box there to check indicating this is a disability payment to a taxpayer who is under the company’s normal retirement age. Checking this box moves the payment to line 7 of the 1040 and also opens up the possibility of EIC to the taxpayer. Tom D.
Permalink Submitted by Alan - IRA critic on Tue, 2013-09-10 01:12
Tom, good point. As far as I know, a 1099R should not be issued for employees prior to their min retirement date. However, some employers seem to issue them anyway, and then the proper approach is to report the income as wages on line 7 like you indicated. The box 7 code 3 is only supposed to be used if the disability is of a permanent nature, but some employers may be opting to report all permanent disability income on the 1099R. This does not really clarify the “taxable compensation” question for IRA contribution purposes since the stated safe harbor is Box 1 less Box 11 of a W-2, not the appearance of an amount on line 7 of Form 1040. Nonetheless, if a taxpayer took the position that a disability payment prior to the min retirement date should have been reported on the W-2 and not the 1099R and therefore should be treated as taxable compensation for IRA contribution purposes, it would be a good test case, and the IRS would probably not question it.