USA Contributing to an IRA with a disability pension.

[mitch197]

Can a taxpayer contribute to an IRA with income from a disability pension. The disability pension is fully taxable and reported on line 1 of the 1040 . The taxpayer's pension fund reports the income with a 1099R . When the tax payer reaches minimum retirement age , the disability pension will end and be replaced with the regular pension. Is this considered earned income and can the taxpayer use this disability pension to contribute to a traditional IRA

 

[BIG E]

There's an inconsistency in what you've stated.
Yes the disability pension income is taxable - but it's not reported on the first line of the tax return - that's for salaries on a W-2.
The disability income, since reported on Form 1099-R is reported on the line that reports IRA distributions - you report the total recieved in the indented line, and the taxable amount on the non-indented line.
And no - the pension income isn't earned income for the purpose of contributing to an IRA.

 

[mitch197]

There's an inconsistency in what you've stated.
Yes the disability pension income is taxable - but it's not reported on the first line of the tax return - that's for salaries on a W-2.
The disability income, since reported on Form 1099-R is reported on the line that reports IRA distributions - you report the total recieved in the indented line, and the taxable amount on the non-indented line.
And no - the pension income isn't earned income for the purpose of contributing to an IRA.

There is not an inconsistency at all. The IRS specifically states ," Disability Pensions. If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 1 of Form 1040 or 1040-SR until you reach minimum retirement age. " Further ,the IRS states ," Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on Form 1040 or 1040-SR, lines 5a and 5b. See Pub. 575, Pension and Annuity Income. " . I think you should let your clients know ,if it applies, that you incorrectly reported their income . What I am uncertain is if it can be considered earned income because it is listed as earned income on line one of 104o.

 

[MoralesTax]

Disability Retirement Benefits
If you get disability retirement benefits before you reach the minimum retirement age, you must claim the benefits as earned income when you claim the EITC.

To find your minimum retirement age, check your retirement plan. The minimum retirement age is the earliest age you could get disability retirement benefits if you didn’t have the disability.

After you reach the minimum retirement age, your disability retirement payments do not quality as earned income.

Source:

Disability and the Earned Income Tax Credit (EITC) | Internal Revenue Service

Find out if your disability benefits qualify as earned income and if you can claim your disabled child to get the Earned Income Credit (EITC).

www.irs.gov

.

I think the key here is double checking your retirement plan to find if you qualify based on your minimum requirement age. If the income is reported to you on a W-2, then it is earned income and you can contribute towards the IRA (given all of the relevant rules and limitations). If the income is reported to you on a Form 1099-R, then it is unearned and you cannot contribute towards the IRA.

Hopefully this helps clarify your situation!