Disability Pension Repayment due to Offset from Social Security

[4582]

Situation:

An individual received a disability pension from their employer (federal government, FERS Disability Retirement).

Under FERS disability retirement rules, if approved for SSDI, the individual must repay 100% of the first year's disability benefits to FERS, and 60% for subsequent years.

The individual was approved for SSDI two years after filing, resulting in a lump sum payment.

FERS contacted the individual to return the money received from SSDI, which the individual is repaying.

However, the repayment is considered as income on the SSA 1099 form.

How is this repayment treated? It seems like someone is getting taxed for money which they will never actually own.

[JamesG1]

If you received pension benefits in a previous year and paid all or a portion back in 2023, you may qualify for a claim of right repayment.

A claim of right repayment occurs when a taxpayer is required to repay income that they had reported and paid tax on in a previous tax year. The repayment must be of funds that, when received, the taxpayer had a reasonable belief he or she had unrestricted access to.

There are two options.  One is for an amount repaid of $3,000 or less.  The second is for an amount repaid of more than $3,000.  For either option, In TurboTax Online, follow these steps.

• Down the left side of the screen, select Federal.
• Down the left side of the screen, select Deductions & Credits.
• Scroll down to Other Deductions and Credits, and click the down arrow to the right.
• Click Start / Revisit to the right of  Other Deductible Expenses.

IRS Publication 525 Taxable and NonTaxable Income, page 37, here, further explains.

In some instances, a tax credit may be computed.  See this treatment under Best Answer.