If you are receiving a service connected disability retirement
from MercedCERA, all or a portion of your benefits may be
nontaxable. The Internal Revenue Code provides special tax
treatment if you retire due to a service-connected disability.
Determining if Your Pension is Tax Free
If your service connected disability pension is no more than half
of your final average salary as determined by MercedCERA, the
entire amount is generally tax free. If your service connected
disability pension is more than half of your final average
salary, then generally the portion that equals half of your final
average salary is tax free and the remainder is taxable. However,
if you retire on a disability under a statutory presumption that
it is service connected (e.g., for heart trouble or cancer),
generally the Internal Revenue Service and Franchise Tax Board
will not treat your pension as tax free.
Cost of Living Allowance (COLA)
In addition, if all or part of your pension is tax free because
it is service connected, then generally any related COLA is tax
free. The COLA will be prorated so that, for example, if
three-fourths of your pension is tax free, then three-fourths of
the COLA will be tax free.
1099-R
If you receive any taxable amount from MercedCERA, the entire
benefit paid to you will be reported in Box 1 of the 1099-R as
Gross Distribution. The taxable amount reported in Box 2a will be
reduced by any tax free service connected disability and by a
portion of your after-tax contributions calculated using the
rules for regular retirement payments as set out below.
