Police and Firefighters Member Handbook: Taxation of Retirement Benefits
When you retire, you will be taxed on all of the benefit payments you receive. Your "tax basis" portion will not be taxed. The tax basis is the 6 percent member contribution that was taxed when the contribution was paid into the plan. “Picked up” contributions are not included in tax basis because they are not considered income when the contribution is made.
Over a pre-determined number of payments, you may recover your non-taxable amount from each benefit payment. Your recovery amount is based on your age at the time your benefits start. The schedule for repayment is set by IRS regulations. After all the non-taxable amounts have been left out of your benefit payments, 100 percent of the remaining payments will be considered taxable income. Each year, the Fund will provide you with a 1099-R form. You will use this form to report the taxable and non-taxable (if any) portion of your benefits.
More information about tax basis is in our FAQs, here.
Make sure to complete the tax withholding forms when you apply for 1977 Fund benefits.
INPRS must withhold income taxes on distributions. INPRS must also withhold federal taxes on monthly payments. You may choose not to have taxes withheld. Make sure to complete the tax withholding forms when you apply for benefits.
The tax rules are complex. If you would like more information, please refer to IRS Publication 575. If you need more help, you should contact your local IRS office or a tax consultant.
PRE-1990 DISABILITY STATUTE – LINE-OF-DUTY INJURIES ON OR AFTER JULY 1, 2000
If you became disabled after July 1, 2000, IC 36-8-8-13.3 will be used to determine if you have a covered impairment that is a duty-related injury or a duty-related disease. Part of your disability benefit may be non-taxable if you are a member of the Pre-1990 Disability Plan. If your injury or disease occurred on or after July 1, 2000 and:
- was duty related,
- incurred in the line of duty
- IC 36-8-8-13.3, IC 5-10-13 or IC 5-10-15 will be used to determine if you qualify for disability.
The portion of your disability benefit that is based on your service over 20 years will be taxable when you reach age 52 if your benefit is determined to be in the line-of-duty. The local board must determine if the disability occurred in the line-of-duty. This determination must be reviewed and approved by the Fund and the INPRS Medical Authority.
PRE-1990 DISABILITY STATUTE – LINE-OF-DUTY INJURIES ON OR BEFORE JULY 1, 2000
The Indiana General Assembly passed House Enrolled Act (HEA) 1048 during the 2011 legislative session. It states, if you hired into the Fund on or before Jan. 1, 1990 and/or you were injured in the line of duty on or before July 1, 2000, you can receive favorable tax treatment, on a prospective basis only.
PRE-1990 DISABILITY STATUTE – INJURIES THAT ARE NOT IN THE LINE-OF-DUTY
If your disability benefit is not related to an injury suffered while on duty, your benefit is fully taxable until age 52. At age 52, the disability benefit becomes a retirement benefit. You may begin to recover any tax basis from your monthly retirement benefits at that time.
1990 DISABILITY STATUTE
Class 1 Benefits – Disability benefits are not subject to federal income taxes.
Class 2 Benefits – The part of your benefit that is based on service is taxable. The 22 percent of your base pay and the additional 10 to 45 percent that is based on the degree of your impairment is non-taxable.
Class 3 Benefits –Disability benefits are fully taxable. When it changes to a retirement benefit at age 52 you may begin to recover your tax basis from your monthly retirement benefits.
Supplemental Benefit – If you are receiving a Class 1 or Class 2 disability benefit at age 52 and you qualify for a supplemental benefit, that benefit is taxable. If there is a cost of living increase, it will be included in the non-taxable benefit.
You may choose the amount of federal and state tax you want withheld from your disability benefits. The forms are available from INPRS.
Tax rules are complex. If you need more information, you should obtain IRS Publication 575. If you need more help, you should contact your local IRS office or a tax consultant.
Section Seven: The Administrative Review Process