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Dear Tax Talk,
How do I determine taxation of disability benefits? I was told that if my disability was given a tax code 3 in Box 7 of my 1099, then I was not obligated to pay taxes. Is this true?
The taxable amount, if any, of your disability distribution is going to be listed in Box 2 of Form 1099-R. Form 1099-R is a multipurpose form issued for various distributions such as those from pensions, annuities, retirement or profit sharing plans, individual retirement accounts, insurance contracts, etc. Some distributions are not only taxable but also subject to an additional 10 percent penalty. The distribution codes listed in Box 7 are used to identify the characteristics of the distribution and help you to determine if you owe the additional 10 percent tax.
In your situation, if the Form 1099-R has a code of 3 in Box 7, this indicates that the distribution is due to disability and is not subject to the 10 percent additional tax. Depending on the specific type of plan that is making the distribution, you may be required to complete Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, when you file your Form 1040.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.