Repayment of Social Security Income when Repayment Occurs in a Subsequent Year

[Michael-R2]

Repayment of Social Security Income when Repayment Occurs in a Subsequent Year; I have income this year from Social Security and have received their 1099.  However, I have submitted SSA Form 521, Withdrawal of Application in which when approved I will pay back all my income I received in 2015 in year 2016.  How should this be treated?  I notice on the SSA-1099 that they do allow for Benefits Repaid - Box 4. Should I report the income on this year's return and make sure the correct entry is recorded on next year's 1099 or record this in some other way?

[IsabellaG · Accepted solution]

First of all, you do report the amount received in 2015 as shown on your SSA-1099.

For 2016, your repayments will create a situation known as a Claim of Right tax issue. Please see this link: https://www.irs.gov/publications/p17/ch11.html#en_US_2015_publink1000171933

If you pay back less than $3000, you will deduct your repayments as a Miscellaneous Deduction on Schedule A.

If you repay more than $3000, you have the option of taking a tax credit under IRC Section 1341 for the year of repayment. Please see these answers for instructions on how to do that in TurboTax for next year.

https://ttlc.intuit.com/replies/3730631

https://ttlc.intuit.com/replies/3730815

[markincypress]

Thank you for the guidance.  I have a similar situation that spans two years.  SS that was received in 2019 and 2020 was repaid in 2021.  Am I able to take the credit for both 2019 and 2020?  If so, do I need to wait to do this until 2021?

[DianeW777]

Yes, the repayment of social security must be used on the year of repayment if it was included in taxable income in an earlier year. If the repayment is greater than $3,000 that was previously included in income then you can follows the steps below in 2021, when the repayment actually occurs.

Note: As of 2018, under the Tax Cuts and Jobs Act (TCJA), there is no longer any deduction for amounts that are repaid of $3,000 or less.

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. 

1. 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 Desktop 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 2020 without deducting the repaid amount.
     2. Refigure your tax from the earlier year (the year you originally reported the income) without including in income the amount you repaid in 2020.
     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 2020 figured without the deduction (step 1)
2. 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 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.

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 actually 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.