2023 SECURES ACT 2.0 LEO deduction for $3000.00

You mention that you receive a tax fee disability pension which I assume is separate from the $3,000 medical deduction that you are concerned about. Most health care costs are allowable as itemized deductions. To be of benefit to you, the total of your medical expenses have to be over 7.5% of your adjusted gross income and the total of your itemized deductions have to be greater than your standard deductions to benefit you. You would enter them in the Deductions and Credits section of TurboTax, under the Medical section, and then Medical Expenses.

 

If you mean that the $3,000 deduction is to be used to offset your pension income dollar for dollar, this would not be allowed if your pension income is not taxable. You can't report negative pension income because a medical deduction reduced your taxable benefits below zero.

 

 

Thanks for the information, Thomas. Retired public safety is permitted this deduction as outlined in the SECURES ACT 2.0. It is specific to our healthcare and a certain available deduction and not subjected to the 7.5% AGI scenario. If we have accumulative $3K in unreimbursed healthcare expenses, we get the deduction. There is just no path on the Turbotax platform to take it.

The feature you want is in TurboTax (at least it is in the desktop version, I haven't tried the Online version yet).

 

In the 1099-R interview, where you enter your pension document, the next screen after the first 1099-R screen is the following (please ignore all the text and numbers - this is a test return):

 

First, since this 1099-R is for a pension, you must say the box is blank.

 

Next screen will be:

 

I assume that you did not see this screen before. Make sure you check the public safety officer box.

 

Next, you should see

 

Tell TurboTax that the money was taken out to pay for health insurance.

 

The next screen will be:

 

Enter the amount paid for the health insurance premium (up to the limit of $3000).

 

Finally, you will be rewarded by seeing the following in the 1040 (look at line 5a)::

 

Thank you Bill. I am using TurboTax2023, provided free via Credit Karma and my high credit score. It saves me a hundred bucks, so....

I had inputted all like your fine example, but it does not take me to see the lines on the 1040 to actually show the $3K or the "PSO" typed in the return. Nor does my return amount increase from what it was prior to trying to take the deduction. I am confident in my refund amount as I have the same number here on Turbotax2023 and on Block's platform. I am apprehensive because after showing the $3K as you described, my refund does not change to reflect the $3K deduction. I truly appreciate your help! Thank you.

As I noted above, I had not tried the TurboTax Online product yet...I assume that Credit Karma gives you access to the Online product (this is what most TurboTax users use).

 

Just now, I went through the Online product. I see that the input screens are somewhat different, but I think you could make it out.

 

Testing the result by looking at the refund may or may not be conclusive. However, when I ran my test and looked at the 1040, this is what I got:

 

 

Look at lines 5a - there's the "PSO" and the $3,000 deduction (well, 5b is $3,000 less than 5a - note that this Online test is NOT the same test as the desktop test whose screens were posted above).

 

Is it possible that you didn't see the 1040? To see the 1040 in the Online product, please do the following:

1. Get into your Online tax return.

2. Click (on the far left) on Tax Tools (you may have to do some scrolling to see it).

3. Then click on Tools underneath it.

4. In the center, click on View Tax Summary.

5. Back to the left, click on Preview my 1040.

6. Now you will see page 1 of the 1040 followed by Schedules 1,2, and 3 (if the are present). Scroll down to line 5a (remember that the 1040 is first), to see what I am talking about.

 

I hope this works for you, otherwise come back and let us know.

Bill,

What a great help! Thanks for walking me through this. I was follow along as you directed and to even see my 1040. However, line 5a shows my full pension amount as per my 1099-R and not the $3K deduction. My refund amount does not reflect the $3K either, so I am not sure what else I could do. Thank you again @BillM223 

I am puzzled when I could so easily produce the $3k exclusion.

 

If you don't mind, please step through the answers to the questions in the screens above and tell us what you entered.

 

Also, what were your entries on your 1099-R: amount, box 7 code, and so on. 

IRS Publication 575 specifies my requirements.  Under insurance premiums for retired PSO, it advises "...reduce the otherwise taxable amount of your pension (mine is ZERO)...by the amount excluded. ($3000.00) The amount shown in box 2a of form 1099-R doesn't reflect this exclusion. Report your total distribution on Form 1040, 1040-SR or 1040-NR, line 5a. Report the taxable amount on Form 1040, 1040-SR, or 1040-NR, line 5b (mine would be ZERO). Enter ""PSO"" next to the appropriate line on which you reported the taxable amount (my taxable amount is ZERO).  If you are retired on disability and reporting your disability pension on Form 1040, 1040-SR, or 1040-NR, line 1a, include only the taxable amount (mine is ZERO) on that line and enter ""PSO" and the amount excluded on the dotted line next to the applicable line. "

 

My 1099-R box 1= $40059; box 2a = $0; box 4 and 5 =$0 and box 7 = 3

Using your numbers, I still get the PSO...

 

What are the values on your line 5a and 5b on your 1040 (you know how to see your 1040, right?)? And you are checking that you were employed as (1) a public safety officer, (2), the money was taken out to pay for health insurance, and (3) the amount was $3,000, right? That's what is triggering the PSO.

5a shows PSO and 40059

5b shows 0

your points 1 2 and 3 are yes, yes and yes

 

2023 IRS 1040 instructions, page 28 tell me " If you are retired on disability and reporting your disability pension on line 1b, include only the taxable amount on that line and enter PSO and the amount excluded on the dotted line next to 1h." My pension is not taxable so it seems pointless to drop the 1099-R as the IRS instructs. Would not the $3K deduction show up as $3K back to me somehow, if under SECURES ACT 2.0 it's permitted? Again, thanks..... @BillM223

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?

Thanks, Bill- I have no other pensionable income in 2023, just the disability LEO pension. The other 2023 income from employment was taxed already when paid in January/February 2023. I retired late January. 

 

PSO qualify for this $3K deduction now in 2023 tax situations whether the pension plan payed for healthcare or the individual paid for the healthcare. That payer requirement has been struck down in the HELPS ACT by the 12-19-2022 SECURES ACT 2.0, which changed the requirement. The IRS 2023 1040 instructions do not reflect this change at all, and it instructs me to "If you are retired on disability and reporting your disability pension on line 1h, include only the taxable amount on that line (ZERO for me) and enter PSO and the amount excluded on the dotted line next to line 1h." 

The 2022 (current) IRS FORM 575 covers our disability pensions and insurance premiums for retired PSO. These instructions also do not reflect the changes in the SECURES ACT 2.0. But they advise "...reduce the other wise taxable amount of your pension (ZERO for me) by the amount excluded ($3000) ... The 2a amount in 1099-R does not reflect this exclusion...report total distributions on 5a. Report taxable amount on 5b and PSO on taxable amount line. 

I think the IRS missed this because surely it can't get reported twice on the 1040 in Line 1 data. I will have to go to the IRS for clarification Monday and directive on how to take the deduction, correctly file it and then come back to TurboTax to see if the platform here can do it correctly to get my deduction of the $3K and not end up wrong and audited. Thanks so much for helping me.

The change in the Secure Act 2.0 was to allow you to take the deduction even when the pension administrator did not make the payment directly to the insurance company (as was previously required); instead, the taxpayer could now have paid that same up to $3,000 to the insurance company and gotten the deduction.

 

However, the Code ("I.R.C. § 402(l)(5)(A)(i) In General ) referred to above, states that deduction is to be taken against distributions from a an Employees' Trust as defined in section 402. That is, the $3,000 is a deduction to a distribution from your pension.

 

However, the $3,000 can be a deduction only against taxable income from a pension. You don't seem to have any, since your $40,000 is tax-free (due to disability). This is why you are not seeing the $3,000 deduction, because you have no taxable pension income to take it against.

 

Even if you had other taxable income, like from an IRA, there is no taxable income from a pension for you to take this $3,000 deduction. As best as I can see from reading the current Code, TurboTax is working correctly. Where do you think the $3,000 deduction ought to appear?

 

I'm just confused by it all. Page 28 of the 2023 1040 instructions, column one under "Insurance premiums for Retired PSO states "The distribution must be from the plan maintained by the employer from which you retired as a public safety officer."  For me, that is Ohio Police and Fire. 

Continuing, "The distribution can be made to you to pay the provider of the health care plan..." For me, I used my distributions in 2023 to cover $4000.00 of health care plan costs.

Columns two: If you are retired on disability and reporting your disability pension on line 1h, include only taxable amount on that line and enter PSO and the amount excluded on the dotted line next to line 1h. I take that to mean, for me, line 1h should be ZERO, PSO, and ($3000).  The paragraph above this I quoted states "...reduce the otherwise taxable amount on your pension or annuity by the amount excluded. The amount shown in box 2a of the 1099-R doesn't reflect the exclusion. Report your total distributions on line 5a and the taxable amount on 5b. Enter PSO next to line 5b.

 

I have almost $80k of taxable income and the city taxed 16K of it. I have taxable income against which to take the deduction even if my disability 1099-R has a ZERO taxable amount. My comprehension after reading this now 10 times is that I should reduce my $40K disability amount to $37K when I input the 1099-R on Turbotax. Problem is the program puts that amount on line 5 and not line 1 as the 1040 instructions specify. Hence, the issue. Nowhere does it state you cannot take the deduction if you have a tax-free disability pension. Thanks...

Page 24 of the 1040 Instructions:

 

This for entries on line 1h on the 1040.

"• Disability pensions shown on Form 1099-R if you haven’t reached the minimum retirement age set by your employer. But see Insurance Premiums for Retired Public Safety Officers in the instructions for lines 5a and 5b. Disability pensions received after you reach minimum retirement age and other payments shown on Form 1099-R (other than payments from an IRA*) are reported on lines 5a and 5b. Payments from an IRA are reported on lines 4a and 4b."

 

So I don't know if I asked you, have you reached the minimum retirement age set by your employer? In other words, is your disability to be reported on 1h as Other Income or on lines 5a and 5b and pension distributions? The answer would certainly affect my test.

 

 

Thanks again, Bill. I retired on disability at age 53 and police minimum retirement age for Ohio is 48.

OK, so since you retired on disability after the minimum retirement age for your plan, then your pension should be reported on lines 5a and 5b (see instructions just above).

 

Of course, since your pension isn't taxable, line 5a has $40,000 (or whatever) and line 5b has 0. And since you can't take $3,000 from 0, you don't see the $3,000 anywhere. The health insurance premium is against taxable pension (line 5a), and since you don't have any, the $3,000 does not appear anywhere.

 

I don't know if this was an unintended consequence, but that is the way the Tax Code (I.R.C. § 402(l)(5)(A)(i) In General ) reads.

 

 

Hello Bill, i looked through the images you displayed but my health insurance premiums were not taken out by my pension administrator. I paid my premiums directly to my insurance from my checking account.  It appears TurboTax is not addressing the change mentioned below?

 

Section 328 of the SECURE Act 2.0, now Division T of Public Law 117-328, modified the direct payment requirement under HELPS by making it optional and created an alternative to the direct payment method, namely allowing the retirement plan to make the distribution to the retired public safety officer. The retiree could then make the premium payment to the provider and remain eligible for the tax exclusion. This change is effective for distributions made after the date of enactment of the SECURE Act 2.0, which was December 29, 2022.
 
The SECURE Act 2.0 also provided that, in cases where the distribution is made to the retiree, the retiree must include with their tax return an attestation that the amount sought to be excluded from the pension distribution does not exceed the amount paid by the employee for qualified health insurance premiums for the taxable year.

 

I am confused as it doesn't seem correct that i indicate the funds were taken out by the administrator when i received all the pension funds and paid my insurance premiums myself???

Let me put it this way: 

 

1. The exclusion is taken out of your pension distribution, whether you paid it or the administrator paid it, that was the change in the Secure Act 2.0).

 

2. However, in your case, you don't have a pension distribution, because it's $0, being non-taxable.

 

3. So there is no place to put the $3,000 because it's supposed to be removed from your taxable pension distribution, which you don't have.

 

Notice the following:

"Section 328 of the SECURE Act 2.0, now Division T of Public Law 117-328, modified the direct payment requirement under HELPS by making it optional and created an alternative to the direct payment method, namely allowing the retirement plan to make the distribution to the retired public safety officer. The retiree could then make the premium payment to the provider and remain eligible for the tax exclusion. This change is effective for distributions made after the date of enactment of the SECURE Act 2.0, which was December 29, 2022."

 

This exclusion had to be taken from a taxable distribution, but you just didn't have one. I believe that if you had had a second pension distribution that in fact was taxable, that this would have worked for you.

 

Like I said above, this looks like an untended consequence, in that you can take the $3k exclusion...but only if your pension taxable was actually taxable - and yours isn't.

 

In other words, you had a pension distribution of $40,000 which was tax-free, so a taxable distribution of $0. You can't make that $40,000 any less taxable, i.e., you can't subtract the $3,000 from zero.

 

I am thinking that you think that the $3k exclusion can show up someplace else, but it cannot because that is not how the law is written. It must show up as part of line 5b on the 1040....which, in your case, is already $0.

 

P.S. I haven't done so, but thank you for your service as a police officer.

OK, I believe i simply was not understanding the terminology. It appears (Assuming i know understand this correctly) that a distrubution is not the same as my monthly "pension" correct?

Yes, your pension is paid to you in one or more distributions. But the issue is that the $3k is excluded from your PENSION. The problem is that your pension - for tax purposes - is $0. So there is nothing to exclude the $3k from.

My pension is fully taxed...  over $5000 paid in 2023? With deductions taken out of each monthly payment to me...

What is your question?

 

@mjnewt1

 

You say "The problem is that your pension - for tax purposes - is $0. So there is nothing to exclude the $3k from." Yet over $5000 was taken out and sent to the IRS for taxes by my retirement plan. Then how is it $0?