Oh, so the letters PSO do show up on 5a? OK, I missed that.
Listen, you don't have any other pension income than this $40k, right? And it is not taxable because your distribution code is 3 (disability). Do you have any other taxable pension income?
The tax code says "I.R.C. § 402(l)(5)(A)(i) In General —
Paragraph (1) shall apply to a distribution without regard to whether payment of the premiums is made directly to the provider of the accident or health plan or qualified long-term care insurance contract by deduction from a distribution from the eligible retirement plan, or is made to the employee."
This is part of I.R.C. § 402(l) Distributions From Governmental Plans For Health And Long-Term Care Insurance which means that the distribution has to be just what it says: from a Governmental Plan. Your pension is a government plan (IRAs are not, for example).
The upshot is that the $3,000 has to be taken out of the distribution from a qualifying pension. If your pension is already tax-free, then you can't take an additional $3k.
So, do you have any other pension income?
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