Payback LTD Income

[MariaMc]

I have a client that receives nontaxable disability income and also started to receive SS disability income. In a prior year, this person had to pay tax on their SS income because of other income on their tax return. They were then required to reimburse the LTD insurance company since they began receiving SS disability.

My question is, would they be entitled to some deduction since they originally paid tax on this SS income but then had to use these funds to reimburse the ins co? Or is there no deduction since the LTD income from the Insurance company was tax free ?

[Edsel]

I say no

Taxation of social security does not create a "basis" in other types of retirement/disability.

In fact, the usual treatment is that the LTD insurance company knows in advance of the SSI payments and subtracts them from their disability payments. In fact, in many instances the payments are decreased dollar-for-dollar every time SSI receives its annual increase. This differs from having to reimburse the LTD company, but the taxation of SSI issue is the same.

Not saying the taxation of social security creates a "fair" circumstance for interrelated income but many things aren't fair.

[DaveO]

You are entitled to a deduction if you are repaying the income. See TTB 1040 pg 3-21.

[Edsel]

Don't Think So

DaveO, I was ready to look it up and apologize to Maria, but after reading TTB I don't think the deduction for repayment applies if it is made to the LTD company. Clearly, it applies if made to the social security administration.

[DaveO]

If they get disability income from SS and from the third party payer in the same year and have to pay the third party payer back they have a deduction. If they are paying back due to income received in the past it's a misc itemized deduction if under $3000. If over either a misc itemized deduction or a Sec 1341 credit.

[MariaMc]

Thank you !

I really appreciate your comments. It didn't make sense to me that they should have to pay tax on all the social security disability payments when they had to repay a portion back to the ins co.