Retroactive Social Security benefits

[FEDUKE404]

In early 2007, a client received Social Security (early disability) benefits. The benefits were retroactive to late 2005, meaning that for tax year 2007 there will be some 2005 benefits, a full year of 2006 benefits, and a full year of 2007 benefits.

It is my understanding that it is allowable to show all benefits as 2007 income, but it is also allowable to report the 2005 benefits on an amended 2005 year tax return, the 2006 benefits on an amended 2006 year tax return, and then a smaller amount of "2007 only" benefits. One would think the 2007 Form SSA-1099 would list the dollar amounts for each of the three calendar years involved.

I am trying to do the "what-if's" regarding the various options. The other income for the three years is reasonably stable, and for all three years the maximum of 85% of all benefits received would be taxed.

Does anyone have any other considerations I need to address? It probably would be just as simple to have a bunch of Soc Sec benefits reported in 2007 and just go onward, and thereby avoiding any amended return paperwork/charges. One clunker is that for 2006 there were sufficient medical expenses to use on Schedule A, and of course with an increased AGI those allowable medical deductions would shrink. AMT is not an issue for the client.

Thanks for all insight!

[DonPriebe]

See Pub 915

In early 2007, a client received Social Security (early disability) benefits. The benefits were retroactive to late 2005, meaning that for tax year 2007 there will be some 2005 benefits, a full year of 2006 benefits, and a full year of 2007 benefits.

It is my understanding that it is allowable to show all benefits as 2007 income, but it is also allowable to report the 2005 benefits on an amended 2005 year tax return, the 2006 benefits on an amended 2006 year tax return, and then a smaller amount of "2007 only" benefits.

You cannot report the earlier benefits on amended returns for prior years since the money was actually received in 2007. You can however use the Lump Sum Election (LSE) to reduce the tax impact. It may not do much good if all the SS is 85% taxable anyway, but it's worth running the numbers.

See page 10 in Pub 915.

[oceanlovin'ea]

worksheets

In pub 915 there are 4 worksheets that you can print out and it walks you through figuring how much would have been taxable in the previous years and the amount of additional tax and how much the tax would be if you did the lump sum election.

I had to do this last year for the first time ever. It was loads of fun. I knew this existed but had never had someone that had the retro social security.

Anyway, the worksheets help a lot.

Linda F

[LTS]

retro soc sec

most tax programs have the ability to calc the LSE. when i do one (maybe a dozen over the years) i still do the wksheets and compare it to the tax program results.

yes, the 2007 soc sec 1099 will show the split year amounts.

my off the top response is similar to DPriebe - if 85% tax soc sec all years, then probably no benefit one way or another.

the calculation and tax results only appear on the 2007 return.

[S T]

Worksheets

CFS has a Taxability and Lump Sum Worksheet.

Do you have CFS Tax Tools?

I have encountered these calculations at least once or twice a year over the last 5 years.

Sandy

[FEDUKE404]

More on those retro SS benefits

Thanks, folks, I do have a bit of omelet to wash from my face over the "amended" issue. I perhaps was getting confused with issues related to some past clients who had to repay previously received (different year) Soc Sec benefits. (Or more likely I'm still in summertime tax mode....)

I did find the worksheets et al in Pub 915. Those worksheets look like a real number-crunching challenge! But I do agree that with the 85% level being reached in 2005/6/7 there's not much hope for lowering the big tax bite for tax year 2007.

At least I'll let the client cruise on Form 2210 Exception 1 (paying prior year taxes timely) to save a few nickels and dimes.

Thanks again!

FE