How do I account for taxable SS disability income that I had to repay to a third party (reimburse a private insurance company that paid non-taxable benefits)?

[sdmurphy1]

I was temporarily disabled (Jul 15-Sep 16) from work, and had both sick leave paid to me (taxable) and third-party insurance paid to me (non-taxable).  The insurance company required me to file for SS Disability to recoup part of their payments, which I did.  In 2017 (long after I was working again), SS finally sent me a lump sum for the prior 14 month disability period.  I then had to send part of that money to the insurance company to reimburse them for their payments.  I now have a 2017 SSA-1099 listing the entire SS disability payment as taxable income (due to my other income that year), but only a letter from the insurance company listing the amount repaid to them, with no type of IRS form. I called them, and they said they don't issue any.  How do I account for this in Turbotax, so I'm not paying tax on the entire SS award, including the portion I was required to reimburse to the insurance company?  The IRS obviously has a copy of my SSA-1099, so I can't just randomly change the amount to reflect the full award less the portion I was required to send the insurance company, without any explanation.  Any suggestions?

[DianeW · Accepted solution]

This can be handled on your tax return for 2017.  First we will handle the social security disability payments.

The Form SSA-1099 should show a total amount in box 5, and then the amount that is designated for each year in box 3.

There is a "lump-sum" method of reporting in this situation which is all done on the tax return for the year of receipt of the benefits.  Enter the appropriate amounts for each year when you start that section of your return.

• The IRS has a special lump-sum distribution calculation that would allow you to be taxed as though the funds were actually received in the year to which they are attributable or as though it were all for 2017.  The lowest tax result will be used.  
  

  Great news: TurboTax can walk you through that process and calculate the proper tax based on your entries.

• If the tax is lower if it had been included on the prior year returns there will be an amount added to the tax this year.
• If the tax is lower by including all of it on the 2017 return then that is where it will be taxed.
• Your SSA-1099 lump-sum section breaks down the payments into what amount was received for each preceding year. You can only enter one year at a time; when finished, click Add Another Lump Sum if you need to enter benefits received for a different tax year.
  

Click the images I have attached to help you.  You will need your prior returns for some of the information.

If your benefits were used to repay any type of prior benefits you received (workmen's compensation, disability payments) follow the steps below to enter your repayment as a deduction on your return.

If the sum of the box 5 amounts on all your SSA-1099 forms, and your spouse's SSA-1099 forms if filing jointly, is used to repay for benefits that you reported as taxable income in an earlier year, see "Repayment of benefits received in an earlier year" in IRS Publication 915 . The instructions to enter your deduction is shown below.

1. Click on Federal Taxes > Deductions & Credits  [In TT Home & Biz:  Personal > Deductions & Credits > I'll choose what I work on].
2. Scroll down to the Other Deductions and Credits section and click on the Start/Revisit box next to Other Deductible Expenses. 
3. On the Less Common Expenses screen-- 

• If the repayment was $3,000 or less:  
• Click the Yes box. 
• Enter the amount on the Enter More Expenses screen. 

If the repayment was more than $3,000:

• Click the No box.  
  
• On the Any Other Deductions screen, click the Yes box.
• On Report Other Deductions, enter the amount in the box Claim of Right Repayment (Only If Over $3,000). 
• Click Continue. 

Click the images attached to enlarge and view for assistance.

[sdmurphy1]

Thank you, Diane W!

[DianeW]

@sdmurphy1 You're welcome!  It's a privilege to help.

[nr-axSpA]

I don't see the attached images referenced in the response.  Could you please share them here or direct me to them?  Thank you!

[DianeW777]

As of 2018, under the Tax Cuts and Jobs Act only amounts that are over $3,000 are eligible for a deduction or credit.  The deduction screens and entry procedures are here for your convenience.

Taking the Income Reduction in TurboTax

1. Login to your TurboTax account or open your tax return.
2. Click on Federal Taxes and then Deductions & Credits.
3. Locate the section Other Deductions and Credits (you may first need to click on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop version.)
4. Click Start (or Revisit) beside Other Deductible Expenses.
5. A number of questions will appear on the upcoming screens. You are looking for the one that reads Claim of right repayment over $3,000. Click yes when you see this screen. (Be sure to ignore the similar question, repayments of $3,000 or less.)
6. Enter the amount of the repayment in the box Claim of right repayment over $3,000 and click Continue.
7. See the images below.

Note: If you want to use the credit you can update here.  Keep in mind that TurboTax Desktop/CD download must be used for that.

[nr-axSpA]

Thank you so much!

[Ray_011]

Hi Wendy, if the repayment is in connection with a tax free disability annuity (I had payed the premiums for the LTD policy, making the benefit tax free), am I still able to deduct the prior year portions for which the "repayment" to the insurance carrier pertained to?  As a tax free payment in years 2019 through 2021 I had not reported any income from this annuity, but was still required to fork over the SSI lump sum, which now appears to be taxable.  Any clarification or confirmation would be much appreciated.  Ray

[DianeW777]

No, you cannot use the Claim of Right because that is allowed for income that was previously taxed on your prior year tax returns.  However, you can use the Social Security Disability (SSDI) lump-sum action to reduce the amount of your taxable social security, even possibly to zero.

• What is a Lump-Sum Social Security Payment?

The lump-sum election has always worked correctly in TurboTax. Have all tax returns available for each year included in the lump sum payment (shown on your SSA-1099).

This can be handled on your tax return for 2022. The Form SSA-1099 should show a total amount in box 5, and then the amount that is designated for each year in box 3. Worksheet 4 is included after Worksheet 2 is completed for each year.

Be sure to select "lump-sum" method of reporting in this situation which is all done on the tax return for the year of receipt of the benefits.  Enter the appropriate amounts for each year when you start that section of your return.   Continue to add each year for all years listed in box 3. There is no amendment required.

1. Open your TurboTax Return > Search (upper right) > type ssa1099 > Click the Jump to.... Link
2. Select Yes you received benefits > Complete your SSA-1099 > Continue > Yes I received at least one lump sum payment for 2021 or earlier > Continue
3. Type a year from your SSA-1099 > Enter the amount received for that year > Continue
4. If you received a Form SSA-1099 for the earlier year enter the box 5 amount, if not enter zero or leave it blank > Continue
5. Enter the filing status for the earlier year > Continue > Select whether you lived with a spouse in the earlier year > Continue >
6. Enter the information from the earlier year return > Continue > Add another lump sum payment (another year from box 3) if applicable or Click Done
7. Continue to follow the screens until you are back at the Income Summary page

Also enter a zero if your Social Security benefits weren't taxable or there were none in the earlier year (such as for a spouse). If you are using the TurboTax CD/Download version review the Lump-Sum Social Security Worksheet in Forms.  You can also review 'Earlier Year Lump-Sum Worksheet' for each year. 

For TurboTax Online review this link to look at your Form 1040 (line 6a): How to Preview My Online Return Before Filing

@Ray_011 

[Ray_011]

Many thanks!  Very helpful ... 

[CindyG5]

I received $58,000. in SSDI back pay.  I had been getting LTD untaxed from a private insurance company,  to whom I had to repay 46,000.  Do i owe taxes on the whole $58,000.?

[DaveF1006]

To clarify, if you received a 1099 SSA, what amount is reported in Box 5?