Jan 23, 2008

Disability Pension Tax Status Question

QUESTION: In 1994 I received Permanent Disability Status. In addition to Social Security payments I was entitled to a Disability Pension from my employer. I was never told this. AS a result I lost my home. In 2006 at the age of 55, I contacted my former employer to ask about my pension. That is when I found out about the Disability Pension. They paid me the back pension, which totaled $59, 000.00 and began to send me monthly payment of $272.58. They did not take out taxes of the $59,000.00I did not file a tax return. I have received a letter from IRS asking for a return. Had I received the pension as it was supposed to be, I would have received money back each year. Now I am afraid that if I file I may have to pay taxes on $59, 000.00, which I do not have. Please any advise you can give would be appreciated Thank you

ANSWER: Thanks for your question. Unfortunately, since the $59,000 of disability pension benefits was paid in 2006, the entire amount is taxable for that year (unless some or all of the cost of the pension benefit was deducted from your paycheck while working). This amount will be taxed as ordinary income on your tax return and taxed at your normal tax rate.
Here are two suggestions to help ease the burden when you file your 2006 return:
1) Request an Installment Payment Agreement when you mail the return to the IRS. Utilize Form 9465 for this purpose. You will be able to spread your tax payments over an extended period of time. Be aware that penalties and interest continue to accrue until the balance is paid.
2) When the balance has been paid, send a request to the IRS asking for abatement of all penalties related to this issue. The fact that you did not know about the disability pension plan until 2006 may be sound reasoning to have the penalties abated.

2 responses:

Anonymous,  January 13, 2009 at 9:37 AM  

What about State taxes. This exact scenario happen to me. I paid off the IRS, now the State is comming after me. I thought that if you were receiving SS disability payments your pension was exempt from State taxes. Am I correct or have I been misinformed?

Jim January 23, 2009 at 5:38 PM  

What state was it? They each have different rules?

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