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.
Hi John,
It sounds to me like you will not qualify for the exclusion. The health insurance payment must be made directly from the pension plan.
Is there any way that you could get the IRA to pay your health insurance directly? I’m guessing not, because they have the lesser health plan, but it’s at least worth asking.
As a Firefighter, I have two options to select from due to the way my pension plan is set up. I can accept better healthcare benefits from my employer and pay my employer for them directly by check. Or have lesser healthcare benefits which are deducted directly from my pension check which is managed by the state I live in.
We have three pension plans, the firefighters hired before 1990 are in either retirement plans one or two and they can only receive their healthcare and pension check from our employer with their healthcare deducted directly from their pension check.
So do I qualify for the PSO benefit even though I make a direct payment for my healthcare?
Hi Charlie,
Good question. I had to look that up. According to IRS Notice 2007-7, the survivors of a retired public safety officer do not qualify for the special tax treatment. (It says so down near the bottom of page 10.)
My mother in law is a widow of a retired police officer. Does this special tax deduction apply to the police officer”s widow who pays this health insurance.
Hi Debbie,
I’m making the assumption that you received a letter from your pension agency saying that you qualify for the HCTC credit. From there, the $1322 would go on line 2 of form 8885, then you’d complete the form from there. Line 5 of the 8885 would go on line 73 of your 1040 form.
I just reread that. It sounds awful, but it’s really just taking the number and mulitplying it by .725. But be sure you submit the 8885 form. (It should be automatic if you e-file but if you’re mailing it you need to attach the form.)
We do not benefit from itemizing our deductions. Our insurance premiums of 4322 deducted from the state of GA Pensions & Annuities minus the 3000 adjustment for PSO leaves 1322. Does the remaining 1322 qualify for the 8885 credit on line 73?
Hi Francis,
That was a difficult one to research. But it looks like you’re right, widows are not entitled to the benefit. That doesn’t seem fair, but that’s the rule. I’m sorry.
It used to be that the widows of retired PSOs could claim the deduction but last year they didn’t allow it. Am I right that the widows can’t claim the deduction?
I am a retired Police Lieutenant and I entered my total distribution on line 16a. On line 16b I wrote the taxable portion. I also wrote PSO next to the taxable portion so that the IRS would know why the number on line 16B didn’t match the number in box 2a of my 1099, but I just received a letter ( last week )from the IRS indicating that I owed taxes for the amount that I deducted for my health insurance premiums. The amount is also included on line 26d of my W-2 summary. I just mailed that information back to them.
When I first retired the IRS also told me that I could not collect a pension at my age. They must have ignored box 7 of my 1099 R that indicates a 2 (early distribution, exception applies). They told me that I had to send them proof that I can collect my pension. I told them that the proof was my 1099 R. They told me that wasn’t proof. I am afraid that they are going to make me pay taxes on the amount of the premiums. I can’t win when it comes to the IRS.
Hi Sal,
Yes, you can put whatever remains of your insurance premium on your schedule A.
im a retired leo if my premiums are 6979 I take the 3000 off of my income can I claim the balance in schedule a?
Hi J,
You can deduct up to the $3,000 from the pension. You want to take it with the pension deduction and not on your schedule A–because you’re right, it won’t do you much good on your schedule A.
I am a retired Public Safety Officer. I think I follow the answers above but need a little clarification, please. On the 1099-R, Line 2a is 478.08 less than Line 2. Line 5 shows that amount as well. I pay a portion of my health insurance premiums which amount to just over 3000.00/yr. (my share) Can I deduct that amount on the form or do I itemize that amount which would be meaningless as I would not get to the 7.5% threshold.
Thank you.
Hi A. Rios,
The insurance deduction is every year so you’ll deduct $2500. The simplified method worksheet is something else–you’re not using that because you have a number in the taxable box of your 1099R. You want tto click the “public safety officer” icon for the insurance deduction.
Did that make any sense?
Hi
I’m about to work on my return. I am a retired LEO. I pay insurance premiums that come out directly from my pension checks on a monthly basis and is paid for continued medical coverage. Example: 1099R, line 1 and 2a are the same amount. Medical premiums paid about $2500.00 are listed on the 1099R in a non number box under box 9b. Is the insurance premium I pay yearly be able to be deducted every year or just a one time deal up to $3,000.00? Also, Do I need to use the Simplified Method Worksheet which has multiple calculations and ends up for me to about $800.00 to be deducted from the pension distribution, so do I use the worksheet or not? I hope this is not to confusing. Thank You