Disability Repayments

[Donanita]

Have a client that received disability income in 2008. Filed for SS and had to repay the disability income back to company.Not able to itemize to deduct the $4051 repayment but reading Pup 525 was looking at the method 2 as a tax credit. Example states income received in prior yr and repaying in this yr. can this method be use when income and repayment are received in the same yr.

[Bert73]

Disability income

I have had a few clients that have filed for SS Disability and it has taken quite a long time to receive it. When lump sum SS for prior year(s) are given in the same year, you can either show the full amount(whether it is taxable depends on other income) or you can go back to aportion the lump sum to each year that it should of been paid.

I am not exactly sure what you mean by paying back the company. If the SS Disability are applied for and given in the same year, there is no need to apportion the income.

[Koss]

Two Different Issues

I believe that the notion of "income and repayment in the same year" refers to income and repayment from the same payer within the same year.

See TTB page 3-21 (Deluxe Edition).

Your client is not making a repayment of benefits to the Social Security Administration. He's probably making a repayment to the employer's disability insurance carrier.

Did your client receive the disability payments from the employer and then pay it back to the employer within the same year?

If this is not the case, then you don't have "income and repayment in the same year." And according to TTB, you can use the credit method if the repayment is over $3000.

If the disability really was paid by the employer and then paid back to the employer in the same year, then it should have been netted out on Form W-2...

BMK

[Bert73]

oops

I was totally misunderstanding the question. "A terrible mind is a thing to waste." Isnt that how that saying goes. Thank you Burton!

[Donanita]

Did your client receive the disability payments from the employer and then pay it back to the employer within the same year


Yes, the disability was from a third party paid for the employer so the amt to repay is included in the client's w2. Client became disabled in March,drew disability inc,then received his social security all in 2008. I agree most don't get their social security in the yr applied for but this client did.

[Koss]

Repayment

Okay, so three things happened, in the following order:

(1) The taxpayer collected disability from the employer's insurance plan.

(2) The taxpayer applied for and began collecting Social Security Disability.

(3) The insurance carrier determined that the taxpayer must pay back some or all of the payments made by the insurance carrier.

When and how did he pay it back? Are you sure he paid it back during 2008?

Did he write them a check? Or was it deducted from his Social Security Disability and remitted directly to the insurance carrier?

If he paid it back within the same year, I still think that the amount in question should not be included in the W-2...

BMK

[Donanita]

Did he write them a check? Or was it deducted from his Social Security Disability and remitted directly to the insurance carrier?


Paper work received from Lincoln Financial stated that they received the refund payment of $4051.96. "which occurred due to the receipt of social security disability benefits is now paid in full".
Client became disabled March 25 of 2008. Received the disability untill Aug.Started receiving SS in Sept. According to the client they paid back the $4051.96,was not paid by SS and the regular wages on w2 statement was $9813.46. The taxable amt in box 1 is $13865.42. Client said the difference was the disability pay. Wage statement also stated 3 party pay was added in box 1

[Koss]

Form W-2

So Box 1 on Form W-2 is 13865.42.

Where on Form W-2 does the lower amount of 9813.46 appear? What box?

Are there any notations or amounts in Box 14?

BMK

[Burke]

Normally, the TP receives a separate W-2 directly from the payor of the disability benefit (in this case Lincoln Financial) since it is taxable. Perhaps because they paid it and it was refunded to them all in the same year, he did not? Was the entire amount in the W-2 he received from his employer subject to FICA? Same amounts in box 1,3,5? Am assuming from your post, disability payments are only in Box 1, which is correct, and has the same effect as if he received a separate W2. However, TTB 3-21 says "For Income and Repayment in Same Year: Reduce the taxable amount by the income repaid and report the difference." I believe the employer's W-2 is in error. Either inquire about a correction or use Line 21 to deduct disability payment.

[AJsTax]

Did he write them a check? Or was it deducted from his Social Security Disability and remitted directly to the insurance carrier?


Paper work received from Lincoln Financial stated that they received the refund payment of $4051.96. "which occurred due to the receipt of social security disability benefits is now paid in full".
Client became disabled March 25 of 2008. Received the disability untill Aug.Started receiving SS in Sept. According to the client they paid back the $4051.96,was not paid by SS and the regular wages on w2 statement was $9813.46. The taxable amt in box 1 is $13865.42. Client said the difference was the disability pay. Wage statement also stated 3 party pay was added in box 1

Sounds to me like the employer received a notice from Lincoln that the employee had received 3rd party disability and the company needed to show that on their 941 to pay their share. The employee share had already been deducted. But Lincoln did not tell the employer the amount was repaid or the employer failed to tell their payroll company the money was repaid and should be removed from the w-2 and that a 941c needed to be filed. This is just a guess from prior experience with this type of problem.
It appears that the correct move would be have a correct W-2 issued to the employee. The money was repaid in the same year???

[Donanita]

Where on Form W-2 does the lower amount of 9813.46 appear? What box?

Not in a box, it is on the w2 wage summary. Payroll is processed by PayChex. nothing in box 14 and box 1,3,& 5 are the same amts.($13865.42). The w2 could be wrong as stated in another post. I will call the client tomorrow and check their weekly paystubs.
I also agree with the other post about a seperate w2 from Lincoln as I have received a w2 for disability and the disability income was reported a seperate w2 from my reg, wages.

[Donanita]

Well,client came in today with a w2 from Lincoln with box 1 $8763.86 and box 3 & 5 $4927.71. so it looks like the $4051.96 is included as income but the only option I see to pull the repayment out is on Sch A but client is not able to itemize.Someone posted pulling it out on line 21 but haven't found any instructions that says I can do this. Anyone have any suggestions so they won't be taxes on the repayment.

[Koss]

Repayment

How did he repay the amount in question?

Did he write a personal check?

If not, how was the amount repaid?

This is extremely important.

BMK

[Donanita]

He paid to back with a personal check.

[Koss]

Repayment of Income

I still say the W-2 is inaccurate. But it may not be worth the time and effort to fight with the employer's accountants over this issue. It's a judgment call.

The repayment can probably be deducted on line 21 of Form 1040.

See Repayments, in Publication 17 (2008), page 87.

The discussion in Pub. 17 centers around cases in which the taxpayer is making a repayment of income that was reported in a previous year. In your case, the taxpayer has repaid the income in the same year. But this fact only strengthens the argument that the amount can be backed out on line 21; it does not weaken the case.

Afterthought: Are you 110% certain that the client made the repayment in 2008?

Did he write the check near the end of December, and mail it to the employer? Is it possible that the employer did not constructively receive the repayment until 2009? This might explain why the amount is still included in Box 1 of Form W-2...

BMK