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Tax Talk with George Saenz

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IRA rules for an individual on disability

Dear Tax Talk:
I am receiving third-party sick pay and Social Security for a permanent disability. I have no other earned income. The sick pay is fully taxable and reported the same way as regular earnings on my tax return. If I make an individual retirement account contribution, would I be eligible to take an IRA deduction?

Dear Robert:
These days, you're in luck.

Generally, to be able to contribute to an IRA you must have compensation. Third-party sick pay is also known as disability income and, in general, would not be considered compensation.

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This was pretty much the interpretation of the IRS until 1990. But in the interest of simplifying tax administration, the IRS ruled in 1991 that any amount properly shown in box 1 of Form W-2 will be treated as compensation for purposes of the IRA contribution limitation. So, as third-party sick pay is properly reported in Box 1 of Form W-2, you can make an IRA contribution.

-- Posted: Feb. 22, 2002

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