Repay long term disability - family benefit

[suzynet289]

I have seen the answers for how to take credit for paying back the long term disability after being awarded SSDI.   However, I am not sure what to do with the repayments that I made for the family benefit that was received for my children.  I assume that since I was taxed on my LTD in previous years, I should be able to get credit for what was paid back for my children.   However, it doesn't seem that I have to enter their family benefit SSDI, since it is under the minimum income for the kids.  (I received lump sum SSDI for previous years for myself and the kids which essentially went back to the insurance company) 

[DianeW777]

The social security disability insurance (SSDI) for your children is considered their income. Because of this they likely do not have enough other income to consider any of the SSDI as taxable income. The portion of the SSDI that belongs to the children, even though it was used to repay your family long term disability payments received before you were approved for SSDI, does not belong to you and therefore would not be allowed as an income reduction on your tax return as a repayment.

Any SSDI that was assigned to you, reported under your social security number (SSN), could be used as a repayment on your return if the amount is greater than $3,000.

Here are you options for using that income reduction on your return, known as a Claim of Right.

Claim of Right

• If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

The answer is based on the assumption that the payment is received in 2021 (and/or earlier years), and some of the repayment of the overpayment did occur in a later tax year (2022). 

Credit: If you choose to use the credit instead of the income reduction, then you would have to calculate that manually.

• The tax return would have to be completed in the TurboTax CD/Download version if the credit is used.  For assistance with this, see: 
  • How to switch from online TurboTax to the TurboTax software? and TurboTax Prior Year Products.​​​​​​​

1. ​​​​​​​Figure your tax for 2021 without deducting the repaid amount you received in 2022.
2. Refigure your tax from the earlier year (the year you originally reported the income) without including in income the amount you repaid in 2022.
3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
4. Subtract the answer in (3) from the tax for 2022 figured without the deduction (step 1)
5. Income Reduction Method (most common): If you choose to use the income reduction method you can use the TurboTax Online or TurboTax Desktop.​​​​​​​

Follow the steps below for the method you have selected.

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 select on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop.)
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.

Taking the Credit in TurboTax

There are two components to taking the credit in TurboTax. The first part entails determining the amount of the tax that was overpaid in the year the income was received. This requires using the TurboTax Desktop product (or another method) to determine what the tax liability would have been without the income. 

1. The credit can only be applied using the TurboTax Desktop product installed on a computer, in the Forms mode.
2. Switch to Forms mode by clicking on Forms icon in the program.
3. In the list of forms on the left click on 1040/1040RSR Wks above the Form 1040 itself.
4. Scroll down to Other Credits and Payments Smart Worksheet (near the bottom) and enter the amount that you have computed on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
5.  Click on the Step-by-Step or Easy Step icon in the upper right corner to return to the interview mode and finish working on your tax return.

See image below for assistance with the credit option.

[suzynet289]

Thank you very much for the answer.   One more follow on question, the amount paid back is slightly less than the amount allocated for the 2 previous years.  How should I allocate the money between the years?   Hypothetical numbers:

* 2020 $20000 SSDI paid in 2022

* 2021 $25000 SSDI paid in 2022

* 2022 had to repay $40000, not the entire $45000 (Lawyer fees didn't have to be paid back and I guess some differences in their calculations) Are there rules as to how the money returned should be applied across the two previous years in order to determine the tax credit?   

Thank you!

[DianeW777]

The repayment should be indicated as to what amount is being repaid for each year. Apply the repayments to the appropriate years as closely has you can based on the information you received about the repayment.  Keep your records with your return. Proceed to determine the credit for each year with the knowledge and information you from the lawyer. 

You can prorate the repayment based on the amount you paid tax on in each year less the amount for legal fees that was not repaid. (amount of taxable income for each year, divided by the total taxable for all years, then use that percentage times the total repayment to arrive at the amount of repayment for each tax year).