Fireman disability income taxable or not?

[Rhodey]

Have a client who is a former lifetime fireman who is retired and collects his pension.  He came down with cancer and informs me that firefighters with cancer do not have to pay tax in RI and the fed due to having been diagnosed with cancer.  His 1099R has code '7' for normal distribution but he presents a document from the RI municipality that his retirement was changed to a status of "disabling occupational cancer" on or about February of 2022.  My question is what is the federal and state implication of this determination?

As always, thanks for your help in advance.

Patrick D.

[BobKamman]

Depends on state law, whether he can retroactively change his pension to workers compensation.  And, he probably needs to follow that process. I have a similar case in Arizona, involving the survivor of a disabled firefighter.  There are some court decisions that discuss whether and how Section 104 applies to these situations, but generally they are not helpful or favorable.  

[abctax55]

I can't speak to RI.

IF the cancer is subsequently deemed to be job related some/all of the pension can be deemed disability & therefore not taxable at the Federal level.  That determination can be done retroactively, and a correct Form 1099-R issued.  But that will not happen by April 18, 2023 (or maybe not by 4.15.24 even...)

I would file an extension to see what/how fast things may happen.  Or if there's a refund, file & amend later.  

But *YOU* or your client can't just arbitrarily determine that some of the pension isn't taxable. 

There's no blanket rule that just because a firefighter gets cancer after retirement that some of the pension isn't taxable.  

[qbteachmt]

I've only seen it the other way around. Retiring due to disability, then conversion to a pension (because that pays more than the disability), means it wasn't taxable until the conversion and then it is taxable because of the conversion. That person didn't necessarily also get healthier. If I find something, I'll post it here. Did the compensation amount change? Is there now a survivor benefit that wasn't included prior to that change in determination?

[qbteachmt]

I found RI:

https://www.iaff.org/presumptive-health/ri/

Sec. 45-19.1-3
Occupational cancer disability for fire fighters.

1... "and any retired member of the fire department of any city or town who develops occupational cancer, is entitled to receive an occupational cancer disability, and he or she is entitled to all of the benefits provided for in chapters 19, 21 and 21.2 of this title and chapter 10 of title 36 if the fire fighter is employed by the state.

2. The provisions of this section apply retroactively in the case of any retired member of the fire department of any city or town."

That should be a start. I would expect RI to know how to issue the informational reporting (or not issue any at all) for nontaxable payments for Fed purposes. They had from Feb 2022 to make that separation.