SS disability and taxable sick pay

[taxmandan]

My client suffered a tragic medical problem in 2009 and was unable to work anymore. She received 3rd party sick pay from her previous employer which was reported on a W-2 and taxable. She was required to pay back the sick pay if she received Social Security disability, which happened in 2010. Her Social Security is taxed due to her husbands income and pensions. It doesn't seem right that she pays tax on the amount she repaid to the insurance company since that amount was already taxed in 2009. I filed the 2010 return with the adjusted amount of taxable SSA but theIRS says it's all taxable and there is no reduction, making the sick pay twice taxed, once in 2009 as sick pay, and again in 2010 as SS disability.

Doesn't seem right but I can't find anything in Pub 915 or the Regs that speaks to this situation. Can anybody point me to some resource to cite so this money isn't double taxed?

[Gary2]

You're looking at it the wrong way. It's not that the social security isn't taxed. It's that the sick pay which was repaid shouldn't have been taxed. Unfortunately, because we are calendar year, cash-basis taxpayers, you can't simply amend 2009 for that amount, nor can you adjust the social security.

But what you can do is claim a deduction or possibly a credit in 2010 for the amount that was repaid. Start by looking in Pub. 17, under Repayments on page 88.

[S T]

See if this helps

Gary is corret, you can not amend 2009 - I found this posted on another site

You can either deduct on Schedule A or compute a credit - From IRS publication 17 "Deduction $3,000 or less. If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 23.

Deduction more than $3,000. If this deduction is more than $3,000, you should figure your tax two ways:
Figure your tax for 2009 with the itemized deduction included on Schedule A, line 28.

Figure your tax for 2009 in the following steps.

Figure the tax without the itemized deduction included on Schedule A, line 28.

For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. Then refigure the tax for that year.

Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts.

Subtract the result in (c) from the result in (a).

Compare the tax figured in methods (1) and (2). Your tax for 2009 is the smaller of the two amounts. If method (1) results in less tax, take the itemized deduction on Schedule A (Form 1040), line 28. If method (2) results in less tax, claim a credit for the amount from step 2(c) above on Form 1040, line 70, and enter “I.R.C. 1341” in the margin to the left of line 70. If both methods produce the same tax, deduct the repayment on Schedule A (Form 1040), line 28. "

Sandy

[appelman]

I believe it's called a claim of right.

I've always thought it was a bit unfair to people who didn't hit the 3K threshold. In many cases, they receive little or no benefit!

[taxmandan]

Thanks for the ideas. It wasn't repaid to SSA, so the Pub.915 info that Sandy posted doesn't really address the issue. I think the way I treated on the tax return probably wasn't the best choice: reducing the SSA payments caused theIRS computer to not match the numbers and generated the change. Rather than adjust the SS payments received, I should have just deducted the repaid amount on line 21 then the matching of SSA payments would have passed muster with theIRS computer. I think we'll file an amended return and go that route after the dust settles from theIRS adjustment.

[okie1tax]

Repay disability

Taxmandan,
You really need to read Sandy's message. That IS the correct way to handle the issue. If you make an entry on line 21, you just compound the error.

[taxmandan]

Taxmandan,
You really need to read Sandy's message. That IS the correct way to handle the issue. If you make an entry on line 21, you just compound the error.

I disagree, Sandy is quoting Pub 915 about the repayment of Social Security benefits back to Social Security, not repayment of third party sick pay. I've read that section several times and it just doesn't apply to this situation.

[appelman]

It is not limited to Social Security repayments.

See this link to Pub. 525:

http://www.unclefed.com/IRS-Forms/2001/HTML/p52506.html

[S T]

Actually

If you read Pub 17 closely under "Repayments" Paragraph 1 and 2 - it does not limit it to Social Security - there is section on Repaid Social Security Benefits, but you need to read "beyond" that.

Appleman on a prior post was also correct in "Claim of Right" so go to the calculatuion illustrated under Pub 525

Also an excerpt from Pub 529

Repayments of Income
If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later.

Sandy

[oceanlovin'ea]

I just wanted to understand this...don't have any additional information.

If the amount repaid was under $3000, it is subject to 2% on miscellaneous deductions on schedule A. If over $3000, not subject to 2%. BUT either way it goes on Schedule A. So if the person can't itemize, there is no deduction for the repayment.

is that correct?

Linda, EA

[okie1tax]

Deduction or credit

You figure it 2 ways if the repayment is over $3,000. One is as a non limited deduction,Line 28, Schedula A and you also refigure last year's (whatever years received the disability) tax return WITHOUT the income. Whichever way is better for you is the one you use. If it is last year's tax reduction that is better than this year's deduction, you use "Claim of Right Sec 1341" on Line ?? as a payment (refundable). Sandy says it correctly.

[appelman]

A qualification

Not applicable to this case, but just to make things clear, if the repayment relates to income reported on a specific schedule, such as C or E, the deduction gets taken on that schedule, rather than on Schedule A.

[Gary2]

I feel obligated to add to this that there have been a number of court cases where the IRS has proposed an extremely narrow reading of the 1341 credit/deduction, based on subtle distinctions. The gist of the IRS position is that the original payment must have been made in error. They've both won and lost cases on this.

One case that they lost is Dominion Resources. I can't easily get a cite for one that they one specifically around this argument.