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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11350
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a 1099 R gross distribution from a pension plan. The

Customer Question

I have a 1099 R for a gross distribution from a pension plan. The distribution code in box 7 is 1 ? I have been on permanent disability since 1994 and I receive SSDI. I was 58 at the time of the distribution. Do I have to pay the 10 % penalty ?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Stetson School of Business and Economics, as well as CFP and CRPS designations.

I can help here

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Based on what you've said ... they have coded the distribution incorrectly

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Code 1 is "Early distribution, no known exception (in most cases, under age 59 ½)"

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The code SHOULD be 3 (disability)

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You DO NOT have to pay the 10% penalty

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IRS has a process for this ... hang on a sec and I'll get it for you

Expert:  Lane replied 1 year ago.

You should ask the plan administrator to correct this ... and there is also a form 4582 (if they will not correct the 1099-R) that you can use to report the correct code

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See this: https://www.irs.gov/pub/irs-pdf/f4852.pdf

Expert:  Lane replied 1 year ago.

But since you'll need to file anyway this year to report the pension income (although it may be below the threshold where you'll have any tax) a simpler method may be to use form 5329 to show that you have an exception

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https://www.irs.gov/pub/irs-pdf/f5329.pdf

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If you use Turbo-tax, or one of the other packages to answer that 1099-R that IRS received, you simply enter the 1099-R as it appears and then there will be a question about exceptions to the penalty and the software will generate the form as part of the return.

Expert:  Lane replied 1 year ago.

But to recap, no there will be no penalty, and you can either (1) follow the IRS process to ask the administrator to correct and file form 4582 to report the 1099-R correctly

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OR (2) use form 5329 to show that you have an exception

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Please let me know if you have any questions at all

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Lane

..

Expert:  Lane replied 1 year ago.

I hope this has helped ... Again, let me know if you have questions

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If this HAS helped, (and you don't have any other questions on this), I'd really appreciate a positive rating (using those stars on your screen) … That's the only way I'll be credited with a portion of what you've paid JustAnswer.com

...

Thank you,

Lane

.

Expert:  Lane replied 1 year ago.

one last point ... it's possible that the income from the distribution (NOT the additional 10% penalty tax) COULD make some of the Social Security taxable.

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SSDI follows the same rules as Social Security retirement for calculating whether some of the SSDI may be taxable.

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I can run the numbers for you of you'd like

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Here's the basic formula:

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  • tax return as an "individual" and yourcombined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.

  • file a joint return, and you and your spouse have acombined income* that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
    • more than $44,000, up to 85 percent of your benefits may be taxable.

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And note that "COMBINED INCOME*" has a specific meaning in Social Security Terminology:

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*Note:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"

Expert:  Lane replied 1 year ago.

I think that covers everything

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Again, let me know if you have any questions ... and if not, I'd really appreciate your using those stars on your screen to rate me positively (That's the only way that JustAnswer will credit expert users for the work here)

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Thank you,

Lane

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