IRA Distribution as wages line 7 (EIC)

[ILLMAS]

About 10-15 years ago, I prepared a tax return for an individual who started receiving a very small IRA distribution, after the partners review, they instructed me to change it to wages so he would qualify for EIC, I did a quick search in the quickfinder and on the IRS website, but could not find an answer and I don't remember 10-15 years back, but can someone shed some light on this, more on how to report in 2013 ATX. I remember the TP became disabled if it makes difference.

Thanks

MAS

[Gileam]

Yes you are correct. If they become disabled and the code i think is 3. They are below the minimal retirement age.

This will be counted as earned income.

[jklcpa]

Yes you are correct. If they become disabled and the code i think is 3. They are below the minimal retirement age.

This will be counted as earned income.

That is true for pension distributions to recipients under retirement age where the distribution is due to total and permanent disability, but I think IRA distributions due to disability still go on lines 15a and 15b. Am I wrong about this?

[kcjenkins]

About 10-15 years ago, I prepared a tax return for an individual who started receiving a very small IRA distribution, after the partners review, they instructed me to change it to wages so he would qualify for EIC, I did a quick search in the quickfinder and on the IRS website, but could not find an answer and I don't remember 10-15 years back, but can someone shed some light on this, more on how to report in 2013 ATX. I remember the TP became disabled if it makes difference.

Thanks

MAS

That makes a BIG difference, if it is a distribution due to disability, it is treated as 'earned income' until you reach age 59 1/2.

What Disability Benefits Qualify as Earned Income for EITC?

IRS considers disability retirement benefits as earned income until you reach minimum retirement age. Minimum retirement age is the earliest age you could have received a pension or annuity if you did not have the disability.

After you reach minimum retirement age, IRS considers the payments your pension and not earned income.

Benefits such as Social Security Disability Insurance, SSI, or military disability pensions are not considered earned income and cannot be used to claim Earned Income Tax Credit (EITC). You may qualify for the credit only if you,or your spouse, if filing a joint return, have other earned income.

[jklcpa]

From Pub 596 - Earned Income Credit (EIC)

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, or Form 1040A, lines 12a and 12b.

Disability insurance payments. Payments you received from a disability insurance policy that you paid the premiums for are not earned income. It does not matter whether you have reached minimum retirement age. If this policy is through your employer, the amount may be shown in box 12 of your Form W-2 with code “J.”

Income That Is Not Earned Income

Examples of items that are not earned income include interest and dividends, pensions and annuities, social security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers' compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans' benefits, including VA rehabilitation payments. Do not include any of these items in your earned income.

[kcjenkins]

That is true for pension distributions to recipients under retirement age where the distribution is due to total and permanent disability, but I think IRA distributions due to disability still go on lines 15a and 15b. Am I wrong about this?

It is still input there, but it then feeds to Line 7, rather than on Line 16b. On the Line 7 worksheet, it will show up on Line 7.

[jklcpa]

From the 1040 instructions for LINE 7:

Disability pensions shown on Form 1099-R

if you have not reached the minimum retirement age set by your employer.
But see Insurance Premiums for Retired Public Safety Officers in the instructions for lines 16a and 16b.

Disability pensions received after you reach minimum retirement age and other payments
shown on Form 1099-R (other than payments from an IRA*) are reported on lines 16a and 16b.

Payments from an IRA are reported on lines 15a and 15b.

[BulldogTom]

Did not know any of this. I learned something new today.

Thanks.

Tom

Hollister, CA

[joanmcq]

I've a client that this will pertain to that just came in yesterday. Thank you for the insight, even if the original post doesn't qualify!

[Gileam]

Yeah this reminds me of an argument. A person wanted to tell me that their 1099G Entitles them to EIC.

My only question was "So how did he earn it?"

That is still is awaiting on an answer 4 years later.

[Richcpaman]

Did not know any of this. I learned something new today.

Thanks.

Tom

Hollister, CA

Tom:

You and me both...

Most want the avoid the tax completely on "disability"..

Rich

[jklcpa]

I learned from this today too! MAS, thanks for asking the question.

[Mr. Pencil]

after the partners review, they instructed me to change it to wages so he would qualify for EIC,

And that is why we all have to file Form 8867 for preparer due diligence now.

[Joel]

For several years I had a client receiving a disability pension from his employer, his wife was totally blind and they had an adult handicapped son. I was so pleased to see the expressions on his and her face when I advised them of the amount of their refund because of of the EITC they qualified for.