Social Security lump sum election

[kathyc2]

If I use the lump sum election to calculate taxable, MUST I use all years? Client received lump sum disability in 2014 that includes full years 2012, 13 and 14 and a small amount for a couple months for 2011. The numbers work out better if I don't use the recalculation for 2011 but just treat that amount it as if received for 2015. So, my question is if I recalculate for 12 and 13 must I also recalculate for 2011? I'm not finding anything definitive either way.

[JudyL]

If I use the lump sum election to calculate taxable, MUST I use all years?

Yes, you don't get to pick and choose.

[kathyc2]

Yes, you don't get to pick and choose.

That is the logical answer, but can you tell me where you found it?

[JudyL]

That is the logical answer, but can you tell me where you found it?

IRC 86(e)(1)(A) and (B)
specifically from (b) where it says " taking into account such portion in the taxable years to which it is attributable."

[kathyc2]

IRC 86(e)(1)(A) and (B)
specifically from (b) where it says " taking into account such portion in the taxable years to which it is attributable."

I'm not really reading that to say you must use all years, but rather that it's saying that if the recalculation for all years is more than claiming it all in the year received, you have the option of claiming all in the year received.

[JudyL]

I'm not really reading that to say you must use all years, but rather that it's saying that if the recalculation for all years is more than claiming it all in the year received, you have the option of claiming all in the year received.

You have it backwards. First of all, the benefits are all reported in the year received. It will be taxed at rates in effect in the year it is received unless you elect to use the lump sum calculations. The election and use of the lump sum worksheet is basically a look back that calculates the tax using the rates in effect as if the benefits were received during each and every year that the benefits were for.

As I said in my first post, with the lump sum worksheet, you don't get to pick and choose which years to include. You either calculate the tax using the current year's rates OR use the worksheet and calculate the taxes for every year that the lump sum affects, but those benefits are still reported in the year received.

If you don't like that explanation, see pub 915, page 11 for the section on lump sum. Under the instructions for Worksheet 3 that you'll be using, it says "complete a worksheet for each earlier year for which you received the lump-sum payment." Then look at worksheet 4 where it is all summarized, and you'll note on line 20 of worksheet 4 that it says "Enter the total...for ALL earlier years...."

[TAXNJ]

JudyL very impressive sources. Hope it works for Kathyc2

[FEDUKE404]

You can't pick and choose

JudyL presented a concise and correct explanation.

You may also wish to look at the bottom of the worksheet on page 13 of IRS Publication 915.

Excerpt: "Complete a separate Worksheet 2 or Worksheet 3 for each earlier year for which you received a lump-sum payment in 2015."

It should also be noted that, if you do not already have the base years rattling around in the old tax software, there can be a fair amount of (time-consuming) number-crunching involved to reach the modified federal tax amounts for those back years.

FE