Form 1099-R - Distribution Due to Disability
A taxpayer who gets disabled prior to attaining the age of 59-½ is able to acquire a distribution from either a qualified pension plan or a traditional IRA without having to worry about the 10% penalty for early withdrawal. Disability in this context must be proven and it must be that the taxpayer is incapable of participating in any economic activity due to either a mental or physical condition. The condition has to be assessed and determined by a doctor or qualified person and it must be that the condition will be long-lasting or last a lifetime. The condition must not be one that the taxpayer is reasonably expected to recover from nor should it be one that is of physical handicapness that does not prevent the taxpayer from participating in a gainful activity.
A Distribution made to a taxpayer due to their disability is entirely taxable to the taxpayer except when the owner has submitted contributions that are non-deductible to the IRA or to a pension plan. Despite the age of the taxpayer, such a distribution cannot get the 10% penalty for early withdrawal.
Form 1099-R - Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc, is used to report a distribution made to an individual due to their disability. To enter this distribution in the Taxx Savage Pro:
- Go to the Main Menu of the Tax Return (Form 1040)
- Proceed to the Income Menu
- Then to IRA, Pension Distributions (1099R, RRB-1099-R)
- Select New then indicate whether it is the Taxpayer or their Spouse who is the Payee
- Enter the EIN, Name and Address of the Payer
- In Box 1, enter the Gross Distribution as it is on the 1099-R
- Enter the amount in Box 2a which is usually similar to the one in Box 1.
- Enter the Distribution Code in Box 7 in the following manner;
- A Code of 3 results in the non application of the 10% Additional Tax for Early Withdrawal. Upon exiting the 1099-R menu, there isn’t any other action that will be required.
- A Code of 1 or 2 will result in the popping up of a Form 5329 Transfer Option. The transfer option should be “Transfer 1099-R Box 2a to Form 5329, Part I, Line 1”. You should then answer YES to the question “Does the Amount being Carried to Form 5329 Qualify for Any Penalty Exclusion?” Select Exclusion #3 that is “Due to Total and Permanent Disability” then key in the gross distribution reported in Box 2a that is eligible for a disability’s exclusion.
Nothing else will be required when you exit this menu. The Taxx Savage Pro will take the amount that is to be excluded from the 10% Additional Tax for Early Withdrawal to Form 5329. The taxable amount of the gross distribution will also be transferred to Line 4b of the tax return (Form 1040).
Note: This is not tax advice. It is a guide on how to enter a distribution reported on Form 1099-R into Taxx Savage Pro when the taxpayer claims a Disability exemption.
Additional Information:
Publication 575 - Pension and Annuity Income
Publication 590-B -Distributions from Individual Retirement Plans