Tax Question. Distribution code in block 7 of 1099-R

Discussion in 'Social and Off-topic' started by joshgo, Jan 18, 2012.

  1. joshgo

    joshgo PEB Forum Veteran

    I'm wondering if anyone else is running into the same problem I am. I was medically retired at the end of 2010. This is the first year I am doing my taxes with retirement income. I noticed when I was filing, that block 7 on my 1099-R is a code 7 which means normal distribution as apposed to code 3 which is for disability income.

    I believe this is due to the error in my 214 when I got out. It said that I voluntarily retired due to length of service. I had it fixed but I don't think DFAS fixed it on their end and it's still not showing as disability retirement. This may not seem like a big deal but as I tweaked with the tax program I found that with a code 7 in there, I'm not eligible for the Earned Income Credit but with a code 3 I am. For me, this is a difference of $8,000!

    I think I should be eligible for it due to this IRS Publication 596. It says:

    I'm calling DFAS tomorrow to see if they need to change it but can anyone else tell me what their code is?

    More info:
    I'm not eligible for CRSC and I'm not yet getting VA comp.
  2. joshgo

    joshgo PEB Forum Veteran

    Can anyone answer this? I called and DFAS basically told me the (even though I am 100% disabled) my retirement income is not considered disability income. That it should be a 7 not a 3.

    IRS publications say for a distribution code of 3 use Internal Revenue Code Section 72 (m)(7)

    Sounds to me like it should qualify... Any help here?
  3. Jason Perry

    Jason Perry Benevolent Leader Site Founder Staff Member PEB Forum Veteran

    Not sure, but my instinct is that the distinction is between a 100% schedular rating and a rating for unemployablitly (such as an IU finding and/or disability under SSDI for being unable to engage in substantially gainful activity). Are you working now? Do you have regular income, other than your disability payments?
  4. joshgo

    joshgo PEB Forum Veteran

    I called DFAS again the next day and talked to someone who knew a little more and was more helpful. He said that the IRS sent DFAS a directive memo in 1991 requiring them to insert a 7 in that block regardless if the person's retirement is from disability or LOS. I asked for a copy of that memo and he's sending it to me. He said he understood my dilemma, that one number different would have my income considered a wages and therefor earned income but they are more concerned with it being taxed properly. So basically there is nothing I can do.

    Maybe if my conditions were combat-related (CRSC) and therefore tax-free, that number would be a 3. Oh well. Thanks for your input!
  5. fdmckeever

    fdmckeever PEB Forum Veteran

  6. joshgo

    joshgo PEB Forum Veteran

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