An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term care insurance.
Any excess over $3,000 goes on Schedule A as a medical expense.
This exclusion reduces taxable social security, and also reduces AGI which lowers the threshhold for itemized medical expenses.
This is something that is not easy to pick up when you are interviewing a taxpayer. It is usually not on the 1099R. Sometimes a taxpayer will mention it to you but some of them are not even aware of it. The important thing is this: Anytime you have a 1099R which obviously comes from a firemen's pension or a police pension you must ask if there are medical premiums deducted from that pension.
The required TaxSlayer entry is to manually reduce the Taxable Amount in 1099-R Box 2a by the amount the Taxpayer paid out of his/her retirement distribution (Box 1) (up to $3,000). You must also check a box on a separate TaxSlayer screen to indicate a retired PSO, and part of his/her distribution was used to pay the premiums for accident or health or long-term care insurance.
Here are the steps to follow.
- From the IRA/Pension Distributions menu, select Nontaxable Distributions.
- On the next page, read the content, then select the 3rd check box, then select Continue.
- Navigate back to the 1099-R page and do the math to reduce the Taxable Amount of the distribution (Box 2a) by the amount of the health care cost (up to $3,000). Any excess over $3,000 goes on Schedule A as a medical expense.
NOTE: Remember, if using the Bogart calculator to figure the Taxable Amount of the distribution, the reduction for public safety officer pension is included in the Bogart calculation, so do not deduct it twice.
- Surprisingly, there is nowhere on the tax return itself to make a record the amount by which you reduced the Taxable Amount on the 1099-R, or the reason why. For that reason, it is recommended you print the Bogart pages and include them with the taxpayer's records in order to document the amount of the adjustment and the reason for the adjustment.
Updated Dec 20, 2019