Repayment of SSI lump sum to private insurance carrier in connection with tax free private LTD

[Ray_011]

I had a lump sum payment in 2022, for which portions were related to 2019 through 2021.  During the time I was receiving a tax free payment from my private insurance carrier because I had "purchased" the annuity (i.e., I payed the premiums, not my employer).  I had to repay all of the SSI payments to my private insurance carrier up until the point they were able to reduce their obligation by the amount I now receive via SSI.  I've now received a letter from my insurance carrier outlining the repayment (a bit over $82,000), and it is unclear to me if I'm able to deduct this repayment given the prior year payments were not taxable, and therefore not reported in my prior year filings.  It is unclear to me if I'm able to deduct this repayment, or otherwise take a credit in my 2022 tax filing.  Any clarification would be a great help.  Ray

[ThomasM125 · Accepted solution]

I believe what you mean is you received tax-free SSI benefits and now you have to pay them back, so you want to know if you can deduct the repayment on your tax return. If so, you can not since you never declared the SSI benefits as income on your tax return. After you pay them back you will have not suffered an economic hardship relating to the payback of monies you previously received or paid tax on income that you weren't able to keep.

[Ray_011 · Accepted solution]

Apologies if I was unclear.  Starting in Sept 2019 I began receiving a tax free LTD benefit from my private insurance carrier (not SSI) as offered by my employer - the reason it was tax free is that I was paying the premium, which changes the character of the income from ordinary income to a tax free annuity.  As with most LTD policies, one is required by the policy to apply for SSI insurance, and if successful, the amount awarded represents a reduction in the total owed by the private carrier retroactively and prospectively.  The SSI case was not adjudicated until 2022 (successfully), which resulted in the SSI lump sum for all of the months starting September 2019.  The rub is that the benefit I'd been receiving through my private carrier was tax free, whereas the SSI payment is not.  So the question is whether or not the "repayment" (i.e., money I received from SSI that corresponded to prior payments in 2019, 2020, 2021, and 2022 that I was required to send to my private carrier) provide tax relief, or do I need to fall on the grenade for the full lump sum amount of SSI received in 2022.  I realize one can allocate the SSI lump to prior years as outlined in the tax form I've received (i.e., recognize 2022 SSI payments in 2022 filing, and portion of the SSI lump that corresponded to prior years to prior years), but not sure if the fact that I had to send the "repayment" to my insurance carrier provides any avenue for tax relief.  Hopefully I've not made matters more confusing!! Thanks for you prompt reply. 

[MarilynG1 · Accepted solution]

Since you weren't taxed on your disability income initially,  you can't claim a deduction for repaying it.

Your goal is to report your SSI lump sum payment appropriately for each tax year so that your tax burden is minimal.

Since you are adding SS income, you may have tax due.  However, depending on the amount of your other income, the SS income may not be taxable, either.  At most, up to 85% of the amount added to each year can be taxable. 

Here's more info on Lump Sum Social Security Payments. 

[Ray_011]

Many thanks for your guidance ... it is what I was expecting based on my read of the relevant IRS publications, but thought I'd ask just to be sure I was not leaving money on the table.  Much appreciated