You report your W-2 for the vacation back pay the same way you would report a W-2 received while you were still working. The vacation pay is considered earned income just like your earnings while you were working. There is no lower tax rate option. If the amount in box 1 of your W-2 plus investment income and retirement income (taxable social security, pensions, etc.) is over $135,000 then your MAGI would be that high. Even though you did not work, you still have earned income from the vacation pay.
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