Taxable Third Party Sick Pay-Repayment

[Peachie]

I know something similar has been discussed here regarding disability and social security payments. My issue fits in nicely with this but I am totally confused. Here’s my dilemma:

2009: Taxpayer received $3971 from AETNA.
2010: Taxpayer received $20,800 from AETNA for a total of $24,671. She retired that year.
2011: Repaid insurance company $23,108.

Social security paid her a lump sum payment in 2011 of $3484 for 2009 and $14,484 for 2010. I have no issue at this time with the SS payments. I am trying to figure out the repayment and used the example in Pub 525 and this is where I got stuck.

Here’s how I began my calculations:

2010 With income, 2010 without income
Taxable income $66,204, $44,127
Tax: $9096, $5781

2011 without deductions with deductions-WHAT DEDUCTIONS?
This is where I am stumped
Tax for 2011 $12,256

I am trying to get the amount needed for the client’s return repayment especially since the repayment is less than the payments received. In other words, I am trying to determine if she’s above or below the $3,000 mark. Please give me baby step answers.

When I ask for help, I am asking for HELPFUL people to assist me whenever you are able. I know many of you are very busy and may not have time-it’s ok-pass me by, but any that can help, it’s s appreciated. Give me back my SANITY, please.

Thank you so much. Please ask any questions. Thanks.

Peachie
ps. When I preview the post, I notice the columns aren't lining up correctly, but I hope you can make sense out of what I'm trying to show. If not, ask me.

[erchess]

My thoughts

Peachie you may know more about this than I do. Here is what I think.

Assuming that she had to make the repayment and that she was required to report and did report the payments from Aetna as taxable income in the years she received them, then I believe she may deduct the repayments on line 21 of Sch A subject to the 2% of AGI haircut we all love so much. I think this is pretty much how it works any time you repay dollars you were previously taxed on. What scares me a little is that I know there are other options in specific cases but I know of none for your case.

I don't have a cite and I did look in TTB online. Maybe someone else has another idea and I'd be most happy to be corrected.

[S T]

Waiting to see other responses, as this is a confusing issue

If the repayment is more than $ 3,000 - isn't there an option of deducting the repayment on Schedule A subject to 2%, or claiming a refundable credit (Claim of Right) somewhere around Line 70? page 2 1040 form? Credit is based on the difference between the actual tax liability in the original year and what it would have been without having the 3 rd party

Then if the repayment is less than $ 3,000 it is only deductible on Schedule subject to the 2%

From what I can gather you do not take into consideration any Lump-Sum calculation on SSA Benefits that were retro.

Peachie, I think you are the right track with Pub 525, I just have not completed one of these in a while, so will have to go re-visit --- [

Hopefully Koss, Gary2 or a few of our more learned "colleagues" will post a simplier explanation for you for the calculations you need.

Sandy

[Gary2]

The simple answer - all I have spare brainwaves for at the moment - is that the Sch. A subject to 2% is almost certainly ok. The other options, either without the 2% or as a credit, is likely to depend on which federal court district the taxpayer is filing in. The IRS has won on the strict interpretation in Tax Court, and lost in at least one federal court of appeals. I don't recall if they've won in any other federal appeals courts.

The IRS interpretation boils down to the money must have been paid in error, based on facts that existed at the time (whether or not the facts were known to the parties). Otherwise, you get a haircut. In this case, it's events that happened in a later year that triggered the repayment. At least one court disagrees.

[jimfrombx]

Since it is over $3,000 you can deduct on Sch A NOT subject to 2% or go back and recalculate as S T has stated. I would guess that the 2nd method (credit) would be better for a few reasons. The Claim of Right may also be on your State taxes as well . Here in NY there is a form for the State and also for NYC.
When you do the lump sum for Social Security you calculate it based on actual returns filed in 2009 and 2010, not adjusted for the repayment. TB has a little write-up on the top of page 3-22

[Peachie]

I love this board

Thanks to each and every one of you.

I am so appreciative of your suggestions. I am being helped in e-mail with this problem and think I may be able to get it resolved. Once I have the answers and a better understanding, I will post here to share so that we may all better understand this part of the tax system. I feel at some point, if you have never faced this, you will.

Happy Thursday.

Peachie