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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11861
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I was a police officer and in 2004 retired with in the line

Customer Question

I was a police officer and in 2004 retired with in the line of duty injury pension, and beginning that year my pension was not taxed. I received a letter stating in 2016 because of recent tax guidance federal income would be with held. Everyhing that I can locate states otherwise?
JA: Thanks. Can you give me any more details about your issue?
Customer: Our normal retirement age is 55, I was 46 when received the injuries, a gun shot would that caused severe damage to left arm and lung, broken back and fracture of left hip. I was medically retired 2004, and had continued to receive non taxable pension based on 66.2/3 of my pay, in December of last I received a notice stating this would now be taxed based on recent tax guidance. My original letter stated my disability and non tax status was based on 1996 "Letter of Ruling" from IRS
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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), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS (Chartered Retirement Plans Specialist) designations. - I’ve been providing financial & tax advice since 1986.

I can help here

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The federal law that applies here is IRC § 104.

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IRC Section 104 provides that compensation for injuries and sickness are not taxable and are excluded from income, further the 1996 PLR that is being referred to here is likely one that was obtained by Ohio Fire and Pension fund.

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Under the private letter ruling, the IRS ruled that OP&F’s governing statute for disability benefits is in the nature of a workers’ compensation statute under Reg. Section 1.104–1(b), and that the disability benefits of a former police officer or firefighter whose disability resulted from an injury incurred in the line of duty were excludable from income under Section 104(a)(1), unless a portion of this benefit is based on years of service.

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If your benefit is still being paid based purely on 2/3 of your pay at the time of disability I would disagree with the application of that PLR - and private letter rulings are specific to the requester anyway, and should NOT be used as (do not have the authority of) law....

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Law takes two forms; Statute law created by congress, and case law created by the courts

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The real statute law here law here IS IRC §104.

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The case law here is Bakken v. Commissioner, TCS 2011-55

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In Bakken the U.S. tax court concluded that the disability income of a police officer who was injured in the line of duty and became permanently disabled remained nontaxable under Section 104 when he reached the eligible retirement age under the plan.

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Now, under the PLR requested by Ohio, the issue was that in Ohio, when a member has 25 or more years of service at the time of retirement, a portion of an on-duty partial disability benefit is based on their service credit That portion is taxable as a service benefit.

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It's that years of service portion that the PLR said would be taxable

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So the application to your situation will depend on whether, in the PLAN DOCUMENT, your pension at retirement age may now be based, at least in part on years of service.

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The task at had HERE is to get hold of the plan document *(not some administrator's publication, or spread sheet or explanation) and see whether your benefit is at any point determined on you years of service.

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* A "Plan Document" is the ruling document that the pension administrators MUST adhere to (and make available to participants) BY LAW.

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If it turns out that NO part of your benefit is based on years of service, then I would contact an attorney licensed in your state (and contacting others that may be similarly affected may also be helpful) to usefight this.

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What you want to do is show that your state's governing statute for disability benefits is in the nature of a workers’ compensation statute under Reg. Section 1.104–1(b), ... and that the disability benefits of a former police officer or firefighter whose disability resulted from an injury incurred in the line of duty are excludable from income under Section 104(a)(1) ... and that under Bakken v. Commissioner, TCS 2011-55, the benefit is still not taxable after retirement.

Expert:  Lane replied 1 year ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane

Customer: replied 1 year ago.
It was great help, spoke with the people at my retirement, they sais they are using info from the irs web site to determine this, think that is nonsense.
Expert:  Lane replied 1 year ago.

If your pension isn't based on years of service but continues to be based on 2/3 of pay, stay on 'em,

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Glad I could help.

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Would really appreciate your positive rating using the stars or rating request.

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That's the only be I'll be credited for my time .

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Thanks,

Lane