Viajero...blogging Ricks Journey: Firefighter, 'Public Safety Officer'

No ‘April Fools’ here, I read that the 2014 Tax Code had 73,954 pages. Apparently, our CPA hasn’t read them all. Just saying 😊

So, if there wasn’t enough craziness to prove once again why I made an edit to one of my key ‘life mantra’s’, our ‘not-so-friend’ IRS, has provided one more. First my mantra was: “Simplicity, Flexibility and Availability”. That mantra later was changed to: “Simplicity (complexity happens), Flexibility and Availability”. Maybe it’s ‘too’ obvious to not expect that ‘IRS’ and ‘Complexity’ are often synonyms.

'Taxable Amount' ... same as 'Gross Distribution'

The year 2019 is the fourth year that we’ve utilized part of the 2006 ‘Pension Protection Act’, that is particular to “Public Safety Officers”. (See page 18 of the 'Summary of the Pension Protection Act of 2006' and 'Distributions to Public Safety Officers). Those included within this cadre are, “Law enforcement officer, firefighter, chaplain, or a member of a rescue squad or ambulance crew”.

The PPA allows a member to draw up to $3,000 from an eligible retirement plan and to be used toward medical expenses “tax free”. For myself I use our 457. For the years 2016 and 2017 I made distributions for both the PPA and for additional expenses. But in 2018 we I only made a draw for the $3,000 PSO distribution. So you can imagine my surprise when I looked at our 1099-R from our financial institution for all three years, and see that line 1 ‘Gross Distribution’ and line 2a ‘Taxable Amount’ are identical. So the initial obvious thought was that our 1099-R was completed incorrectly by the company. Oh no, that would be to easy. No, in fact this is the method in which the IRS has set this up.

How do I know this? I’m glad you asked. Go to the ‘Instructions for Forms 1099-R’ and scroll down to ‘Box 2a Taxable Amount’. There you find that the 1099-R is NOT to reduce the ‘$3,000 exclusion’. Common sense says, “This would be a great place to reduce an amount that you’re not going to be required to pay taxes on. For it says, “Taxable Amount”, but no, again this would be to easy.”

So Rick, what’s the BOTTOM LINE? When you make a draw from your financial institution, they do not withhold taxes. But, when you receive your 1099-R the $3,000 IS included in both your ‘Gross distribution’ and ‘Taxable amount’. So…in order to not pay taxes YOU MUST reduce the ‘Taxable amount’ somewhere. And our friend the IRS has decided that in 2017 and prior that you would make this distinction on Line 16 of Form 1040, ‘Pensions and annuities’. In 2018 the line is changed to ‘4’ and called, ‘IRA’s, pensions, and annuities’. As stated in Publication 575, not to be mistaken with Publication 757 (how to pass a kidney stone tax-free), page 6 says, “reduce the amount ($3,000) on Form 1040, line 4b”. Then you add, “PSO” adjacent and walla, you’re done.

Seriously, how difficult was that? Honestly, I’m pretty sure that the IRS has been smoking something funny for much longer than it has been allowed in Oregon. Totally dude!

Reduce '4a' by $3,000 place into '4b' and write 'PSO' to the left

Anyway, it’s just possible that your CPA is not aware of the above information. Please let them (and our fellow PSO's) know, make your appropriate amendments, save some taxes and … have yourself a skinny salted caramel latte without cream.