As a tax preparer, you will see all kinds of clients. Each new job will bring unique tax situations, and it is essential to brush up on these lesser-known rules before meeting with them.
Retired Public Safety Officer Exclusion
This type of job includes retired law enforcement officers, firefighters, chaplains, members of rescue squads, and members of ambulance crews. If they are eligible, they can choose to exclude distributions made from a qualified retirement plan from their income. These distributions must be used to pay the premiums for coverage by an accident, a health plan, or a long-term care insurance contract. Programs that qualify include a qualified trust, a section 403(a) plan, a section 403(b) annuity, and a section 457(b)plan.
To be eligible, the taxpayer must meet several requirements:
- They must have retired because of a disability or because they reached the retirement age.
- The coverage premiums in question must apply to either the taxpayer, their spouse, or their dependents.
- The distribution must be directly from the public safety employer.
- It must be made directly from the plan to the provider.
- The distribution excluded from income must be either the smaller amount of the premiums or $3,000, whichever is less.
- The election can only be made for amounts that would otherwise be included in income.
How to Correctly Enter the Exclusion
To enter the amount that is excluded from the taxpayer’s income for tax year 2017 and newer, use Form 1099R, Box J. Use the following steps to enter this information:
- Enter either the smaller amount of the premiums or $3,000, whichever is less, in Box J. The correct taxable amount will be carried over to either Line 7 or 16 of the old Form 1040 for years 2017 and prior. For years 2018 and newer on the new Form 1040, this information will be carried over to either Line 1 or 4.
- Record the correct Distribution Code in Box 7.
- If the code is a 3, you have the option to carry the amount over toLine 7 of Form 1040 for years 2017 and older or Line 1 for years 2018 and newer. If the code is anything other than a 3, it will automatically carry over toLine 16 of Form 1040 for years 2017 and older or Line 4 for years 2018 and newer.
For tax year 2016 and prior, use this method:
- Enter the gross distribution in Box 1.
- Subtract the amount of the distribution from the Gross Distribution and enter the difference in Box 2a.
- Choose to exclude either the smaller amount of the premiums or $3,000, whichever is less.
- Typically, this amount belongs on Line 16 of Form 1040, but depending on how the 1099-R is filled out, it may be Line 7. Refer to Form 1099-R when deciding.
- If you select Line 7, input the amount of distribution being excluded on this line as well.