Adding a Form 1099-R can reduce your refund because it increases your taxable income. If you didn't have enough tax withholdings to cover the increase in tax, this will reduce your refund.
The increase in income can also move you into a higher tax bracket and may phase you out of certain tax credits, such as the Earned Income Tax Credit (EITC) or the Child Tax Credit, which are based on specific income thresholds.
Because you refer to this as federal disability retirement, there are a couple additional rules, so you want to make sure everything is entered correctly.
If you have not yet reached the "minimum retirement age" set by your employer, the IRS requires these payments to be reported as Wages rather than pension income. This will affect your qualification for Earned Income Credit.
To make sure you have this entered accurately, and avoid overpayment of tax:
- Go to the Federal section in the left menu.
- Select Wages & Income.
- Scroll to Retirement Plans and Social Security and click Start/Revisit next to IRA, 401(k), Pension Plan Withdrawals (1099-R).
- Verify that Box 7 (Distribution Code) matches your form exactly.
- Code 3 indicates Disability.
Answer the follow-up questions carefully, specifically the one asking if you have reached minimum retirement age.
If you answer No, TurboTax will correctly move this income to the Wages line of your Form 1040, which may qualify you for the Earned Income Tax Credit.
To see exactly how the 1099-R changed your return:
- Select Tax Tools from the left menu, then Tools.
- In the pop-up window, select View Tax Summary.
- Review your Total Income and Total Tax with the 1099-R included.
- You can also select Preview my 1040 in the left menu to see if the income appears on Line 1h (if under retirement age) or Line 5b (if over retirement age).
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