Retired public safety officers may be eligible to exclude up to $3,000 from their pension distributions for money that was used to pay the premiums for accident or health insurance or long-term care insurance. Public safety officers include law enforcement officers, firefighters, chaplains, and members of a rescue squad or ambulance crew. In order to qualify for this deduction, the payment for the insurance must be made directly from the pension plan to the insurance provider. Basically you exclude the smaller of the amount of your insurance or the $3,000. If you’re excluding the insurance from your pension income, then you can’t include it as a Schedule A deduction.
So if you’re making this deduction, how do you show it on your tax return? First, I guess I should be using the right words. It’s not really a deduction – you are “making an election to exclude the insurance premiums from your income.” Now you’ve just had a lesson in tax geek semantics. I know you don’t care, but I’m supposed to use the right words. For what it’s worth, a reduction in income is better than a deduction.
Anyway, if you look at your 1099R, which shows your pension distribution, the box 2a which shows what part of your pension is taxable doesn’t show your insurance payment, so the exclusion isn’t automatic. Here’s what I mean – let’s say that you receive a public pension for $25,000 a year. $5,000 of it isn’t taxable so your 1099 shows $25,000 in box one (your gross distribution) and $20,000 in box 2a (the taxable amount). But if you paid $4,000 for your health insurance, you’re allowed to exclude $3,000 of that money from your income. So really your true taxable amount is $17,000.
If you are doing this by hand, you’d just write it on the 1040 like this: On line 16a you’d write $25,000 for the total amount of the pension, and on line 16b you’d write $17,000 for the taxable portion. You’d write PSO next to it so that the IRS would know why the number on line 16B didn’t match the number in box 2a of your 1099.
It’s really important that the numbers on your tax return match the numbers in the boxes on your 1099. When they don’t, you get little letters from your friends at the IRS. Writing PSO on your tax return basically tells them that you’re not just arbitrarily changing their tax figures for them.
So how do you do this if you’re using a computerized tax program? That’s a little trickier because you can’t just go and change the numbers without somehow notating it. If you just type in $17,000 in box 2a instead of the $20,000 number, I guarantee you you’ll be hearing from the IRS. And we don’t want that do we?
If you’re using the 1040.com program, it’s really easy. When you’re in the 1099 input screen, you’ll see at the top there’s a little phrase in blue letters: “Special Tax Treatments.” You’re going to want to click on that button. It will take you to a new page with other items that also require special tax treatment. The “public safety officer” insurance is at the very bottom. All you have to do it type in how much you paid into the little box and the program will handle the rest.
Other tax programs should have something similar. If you can’t find a “special tax treatments” page, call the phone number listed with your program and they should be able to tell you how to get there. And if they can’t, come back here and use my 1040.com site (sorry for the shameless plug but a girl’s gotta eat.)
Special thanks go out to Mr. A—– in California for the idea for this post.