Repayment of Income!

[quicksam]

Client received $17000 from long term disability in which she received a W2 for 2006. In December 2006 she was told since she received a lump sum payment of her Social Security that she would have to pay some of the money back.

After the attorneys and the insurance company refigured the correct amount they contacted her on Jan. 3rd 2007 and told her she would have to pay back
$8000 of the money. On Jan. 4th 2007 they deducted the $8000 from her checking account.

She owes about $2000 with her return for the 2006 year. This is claiming the whole 17000 disability. Based on the repayment guidelines she is to take the repayment as a misc itemized deduction not subject to the 2% on her 2007 return. The only problem is she is not going to owe any taxes on her 2007 return because her only income now is the Social Security.

If they would just have deducted her money on Dec. 31st 2006 it would have saved her a ton of money which I do not think she is going to be able to recoup.

Does anyone know of anything that can possibly be done since they reclaimed the money so close to 2006 and before she filed her return?

Lester

[geekgirldany]

I had to deal with this a few years ago. You can either take it as a itemized deduction or claim a “I.R.C. 1341”

http://www.irs.gov/publications/p915/ar02.html#d0e2528

But like you said this is done in the next tax year. Wish I could help you more.

[jainen]

turn on your charm

>>anything that can possibly be done <<

If this were some big corporation, they would give it to their lawyers and the problem would go away. An individual doesn't have the resources to fight unfair applications of the rules.

Notice that she did not write the check or even authorize the withdrawal. Social Security was able to make a demand on the bank for repayment of the excess. I take that as proof that she did not have an unrestricted right to the money, which is the definition of constructive receipt.

I suggest you recalculate the taxable SS without the repayment amount. Leave the gross amount alone so it matches the 1099 and maybe the IRS won't notice that you did overrides on everything else! Tell your client it probably won't work so give you a call when they get the letter (next year). Probably the IRS won't fight you when you contact them in person and turn on your charm!