Disability & SS

[TAX4US]

TP received disability from ins co for 09,10,11. TP receives SS lump sum in 2011 for 09,10 plus regular benefits for 2011. Ins co promptly pulls all funds it paid out. TP did not report SS on 2011 return. IRS sent CP 2000 for unreported SS on 2011 tax return. The amount we are looking at is 39K in SS. AGI on return 95k. It looks like IRS only Taxed 85% however INS took 100%. TP did report and pay tax on disability for years in question. Question is how would you handle this? Many thanks for replying.

[FEDUKE404]

Two different issues involved

REPAYMENT:

IRS Publication 915 covers this scenario quite well, including worksheets.

You may need to review IRS instructions for Schedule A, line 23.


SOCIAL SECURITY BENEFITS:

Taxable in year of receipt of all funds. You may need to do some side calculations (due to multi-year issue) to reach the correct taxable amount.


The IRS notice is taking their "worst case" scenario by taxing the SS benefits at 85%. The insurance company of the private employer is looking for a full repayment of disability payments erroneously made to the employee in prior years.


FE

[Burke]

SOCIAL SECURITY BENEFITS:[/b]
Taxable in year of receipt of all funds. You may need to do some side calculations (due to multi-year issue) to reach the correct taxable amount.
FE

For TAX4US:
Most software has worksheets to calculate this as well. It is a Lump Sum Settlement scenario and although the taxable amount is all claimed in 2011, it is calculated as if it were paid in the individual previous years. Also covered in Pub 915 if your software does not do this.

[taxea]

The software may not automatically calculate this as it does not know this is a lump sum payment unless you input it properly. All income reported by third parties must be input and then adjusted as needed. One cannot dismiss the 1099 because the rules say it isn't taxable. Input the amount and if not taxable back it out. The IRS computer only looks for reported income. It too, does not figure out the income is not taxable.

[FEDUKE404]

Gross Social Security benefits are still reported

The software may not automatically calculate this as it does not know this is a lump sum payment unless you input it properly. All income reported by third parties must be input and then adjusted as needed. One cannot dismiss the 1099 because the rules say it isn't taxable. Input the amount and if not taxable back it out. The IRS computer only looks for reported income. It too, does not figure out the income is not taxable.

I think Burke was referring to the Social Security benefits received and to be reported on tax year 2011 return ONLY.

The fact that the Social Security payments were a "lump sum" payment is irrelevant to the total amount shown as received in 2011. At that point the benefits can be taxed using the regular Social Security benefits worksheet, or if more advantageous considering the income amounts for the years covered by the payments for those years. (The SSA tax document should list those amounts in the details.) IIRC, use of that alternative calculation requires a line reference to the code section or something similar.

The worksheets now included with most tax software make the alternative calculations a bit simpler. Of course, you also have to locate the tax returns for each of the prior years involved.

Suggest you also visit this link: Back Years

It is also worth noting that the only tax return that will be changed will be 2011. The 2009 and 2010 returns stand as filed, barring any issues that might require an amended return. As for claiming the repayment of the disability insurance amounts, that item is reported on the tax return of the year when such repayments were effected Most likely 2011?

FE