Help With Your Form 1099-R

We’ve been receiving calls and emails from Boston members who receive an accidental (work related) disability pension. They were surprised to see that the federal income tax statement they recently received from the Boston Retirement Board, known as Form 1099-R, was totally different from the forms they received in previous years.

As a full-service organization, we’ve been working with the Boston Board staff and officials to straighten this out. In addition to what Boston disability retirees have received from their Retirement Board, we offer the following key points.

And don’t forget, if you are an Association member, don’t hesitate to contact us for additional help.

*The federal tax treatment of your accidental disability benefits has not changed at all.

We’ve included with this Alert an IRS Ruling to PERAC (Public Employee Retirement Administration Commission), which is the state’s pension oversight agency. To summarize, the IRS rules that the only portion of your disability benefits that is subject to federal income tax is the annual annuity. In its recent memorandum to its disability retirees, the Boston Board provided each member with their 2013 annual annuity – again the only amount subject to federal income tax and an amount that never changes.

*Do not file a Federal Income Tax Return that includes the total disability benefits as taxable income.

An Association member reported to us that because of the new 1099 –R Form, he went to H&R Block who inserted all his disability benefits, including his pension (72%) and COLAs (Cost-of-Living Adjustments) benefits, as taxable income on his return, resulting in thousands of federal taxes. We recommended that he not file this return and wait for more information. We suggest to our Boston accidental disability members that they not include all their disability benefits (shown in Box 1 on their 1099-R Form as Gross Distribution) as taxable income on their 2013 federal income tax return.

*If an accidental disability retiree began public service on or after January 12, 1988, the total amount of their annual annuity, as recently reported to them in the Boston Board’s Memorandum, is taxable.

In its Ruling to PERAC, the IRS explains that an accidental disability retirement has three (3) major components. Briefly they are: an annual annuity that is essentially a lifetime annuity based upon your contributions; an annual pension equal to 72% of your regular compensation and if any, a fixed supplemental dependent allowance for eligible children.

In its recent Memorandum to disability retirees, the Boston Board states that while the pension (72%) portion of your retirement is tax-free, the annual annuity portion is taxable. According to the attached IRS Ruling, any fixed supplemental dependent allowance is also tax-free [Page 5, Paragraph (2)], as well as any COLA benefits [Page 6, Paragraph (8)].

When it comes to the taxable portion, specifically the annual annuity, Association members have asked whether they can exclude any portion of their annual annuity as taxable income. Unfortunately that question doesn’t lend itself to a clear concise answer that we can provide in this Alert. That said, we offer the following information to shed some light on this complicated issue.

On or after January 12, 1988, pension contributions, made by Mass. employees, became what are called pre-tax contributions. This means that when an employee contributed to their pension on or after that date, these payments were excluded from their gross income and therefore exempt from federal income tax. Since they were not subject to federal tax back then, these pre-tax contributions cannot be tax-free again when the employee retires and begins to collect their pension and must be included as taxable income.

Therefore, if an accidental disability retiree began public service on or after January 12, 1988, then all their pension contributions, while they were working, would be pre-tax contributions, and the total amount of their 2013 annual annuity, as shown in the recent Boston Board’s Memorandum to them, is taxable. Please note that if an accidental disabiltyretiree began public service before January 12, 1988, you may want to seek professional tax advice to determine if any portion of the 2013 annual annuity is tax-free.

*An accidental disability retiree, who may not have had to file before this, may want to consider filing a 2013 federal income tax return.

An Association member contacted us that before now, he hasn’t had to file a federal return but, with this new Form 1099-R, he must seriously consider whether he may do so in order to show the IRS that his small annual annuity is the only taxable portion and he owes no federal tax. It’s regrettable that he may incur a new expense, namely paying a professional to prepare a return for the “first time” since retiring. If you’re in a similar situation, we suggest you at least consider seeking professional tax advice.



IRS Tax Letter.pdf262.61 KB