1099-r Box 7

[sb76]

My husband receives disability retirement from the State of Maryland.  He became disabled before minimum retirement age and is currently under retirement age.  State of Maryland put a 2 in box 7.  According to IRS instructions his income must be entered on line 1 until he reaches retirement age.  It is considered earned income and we get the earned income credit.  

We contacted them to ask them to change the code to 3 for disability.  They told us the code 2 is right and refuse to change it.  They claim the only people who they can use a 3 for are ones who receive Accidental Disabilty(injured on the job).  He receives ordinary disability due to a health condition.  They said the IRS told them they cannot use code 3.  

This contradicts what the IRS wants us to do for taxes.  On turbo tax entering a 2 does not give the option to select that he has retired early dues to disability.  Only code 3.  I spoke to an accountant who said the 2 is wrong and puts the income on the wrong line.  Does anyone know of this tax law?  Is this a special arrangement that Maryland has with the IRS?  

[Vanessa A]

According to the IRS, you are correct, if he is receiving retirement disability income prior to reaching retirement age, it would be considered earned income. 

If your 1099-R is incorrect, you will need to fill our form 4852 to report to the IRS that it is incorrect.  You can do this in TurboTax by using the jump to search link and searching for form 4852.

In the meantime, to enter it as disability income, you can select

•  Income
• Less Common Income
• Miscellaneous Income
• Other Income not already reported on a Form W-2 or 1099
• Yes, to did you receive any other wages
• Then enter the amount in the spot for sick or disability pay.  This will put it on line 1 h of your 1040 for Other Earned Income. 

When you include form 4852 with your return, you will need to print and mail your return.  

[sb76]

Thank you for your reply.  The previous two years we took taxes to an accountant because of this issue.  I’m pretty sure she just put a 3 so it would work.  I am now worried about being audited.  The tax person we asked this year said the only way she could have gotten it to go through was to put a 3 and she wouldn’t suggest doing this and we need to get it corrected.  The State of Maryland Retirement agency is adamant that they are correct and refuse to change it.  If we complete the form 4852 could Maryland come back and say it is incorrect or would the IRS look into it at that point.

[JulieS]

Yes, if you follow the procedure for filing with a Form 4852, the IRS will look into whether the 1099-R was completed correctly. 

The state of Maryland could say it is incorrect, but I also agree this is the best way to handle the situation. Click here for more information. 

Be sure to contact the IRS first by calling them at 1-800-829-1040  or make an appointment at the Taxpayer Assistance Center (TAC). Click here to find a TAC near you.