How to claim a lump sum repayment for Long Term Disability?

[Dshow]

Hi,

I started receiving Long Term Disability benefits from an Insurance Co. in 2020.  In 2021, I was approved for SSDI benefits and they gave me a lump sum, which I in turn gave to the Insurance Co.  The lump sum repayment does not show up on the W2 from the Insurance Company.  I read a similar post regarding a 'Claim of Right' which I think applies to me as well...  (https://ttlc.intuit.com/community/taxes/discussion/ssa-1099-lump-sum/01/1865495#M666411)

My question are:

1)  I use the Desktop version and deleted the 2020 version and have already installed the 2021 version.  To figure out the tax difference in 2020 with and without the SS payment, do I need to reinstall the 2020 software?  Or, under 2021 Other Deductible Expenses, can I just put the total amount of the lump sum that applied to 2020?

2)  The tread above mentions State taxes...  I have not even started looking at that yet...  I am in Indiana.  Do I have to do anything for my State taxes regarding this?

Thank you!

[AmyC · Accepted solution]

Answers are

1. There is no need to uninstall prior year software. You should refigure your taxes. Please see methods 1 & 2 and the example on page 36 of Pub 525.  The IRS states you should take the one with the lowest tax liability. Here are your options and how to do it, see What is a Claim of Right Repayment.

2.Many states begin with the federal AGI, like IN, in which case, there is nothing extra to do for your state.

[Dshow]

Thank you!

In #2, you mentioned nothing extra is needed for my State taxes.  Does TurboTax take care of this automatically?  (I don't understand...  I thought that IN did not tax Social Security wages and this lump sum replaced wages I paid State tax on last year. ) 

[DianeW777 · Accepted solution]

Yes, TurboTax will handle the flow of income and adjustments which will flow to your state return because IN starts with the federal adjusted gross income (AGI).

The income was taxed so it should reduce income or tax for both tax returns.

[Dshow]

Hi,

I got around to doing my taxes and I have some follow up questions on this topic.  I received an SSA-1099 and the total income reported includes the lump which was for a prior year.  The SSA-1099 indicated the amount of the income that is for last year.

My questions are:

1). Do I indicated the total amount of the SSA-1099 on this years taxes?  Or do I subtract last years amount from the total and recalculate last year using this figure?

2). If I include the total amount this year (pay tax on the total amount this year). I assume I do not include that amount in last years taxes when I figure my ‘right of claim’?  (If I include that, I would be paying tax on it twice...)

[AmyC]

1. You enter the form exactly as it is, all the income into the program. Then, if you are itemizing deductions, and if the claim is over $3,000, then you can add the repayment to your itemized expenses.

2. If you are not itemizing, you are going to figure your right of claim. Make a copy of your return from the year you received the income before going in and changing things. Note the amount of tax liability. Then you can subtract the amount you paid back from the original amount received. Note the new tax liability. The liability is before all the credits are given. The difference in liability should be noted. Return to this year/s tax return, do the IRC 1341 for 1040 p2 as my original instructions state. Follow What is a Claim of Right Repayment.

You are not amending or submitting a prior year return, only this year.

[Dshow]

Thank you.  I am Itemizing because TT recommended I do so.  So I enter the total amount in this years tax form and the amount that is for last year will be deducted in my Itemized deductions.  How do I figure my ‘right of claim’ (?) (get credit for the amount my taxes for last year would have been reduced if I would have received the payment last year?)

Thank you!

[RaifH]

The claim of right allows you to take taxable income as a deduction that you received in a prior year if it turns out that you had to repay that amount. Note that the long term disability payments had to be included as income last year to be eligible for a claim of right. LTD usually is, but it depends on whether you or the employer were paying the premiums.

If you want to claim it as an itemized deduction this year:

1. Select Federal, then Deductions and Credits
2. Scroll down to Other Deductions and Credits (you may need to select See All Tax Breaks and/or Show More)
3. Scroll down to Other Deductible Expenses and select Start (or Revisit)
4. Answer the questions until you get to the Did you have any of these other expenses? screen.
5. Select Yes
6. On the Tell us about your other expenses screen, enter the amount of the repayment in the Claim of right repayment over $3,000 box and select Continue

The amount that you are entering in step 6 is your amount of taxable LTD income that you received in 2020 and had to repay to the insurance company in 2021. 

The second method is to recalculate your 2020 taxes as if you never received that income to begin with. To do this, you would reduce your taxable income in 2020 by the amount you repaid in 2021 and then calculate your taxes in 2020. You can take a credit this year for the difference between the taxes that you paid and the taxes you would have had to pay had you never got the payment in the first place in 2020. You will need access to 2020 to recalculate the difference. To claim the credit in 2021, you will need TurboTax Desktop for 2021:

1. Return to the current tax year (The credit can only be applied using the Forms mode in the TurboTax CD/Download product)
2. Select the Forms icon
3. Choose 1040/1040SR Wks from the list on the left and the worksheet will appear.
4. Scroll down to the Other Credits and Payments Smart Worksheet (you can find this in a box near the end of the worksheet)
5. Enter the credit amount you calculated on Line E, Claim of Right, IRC 1341 credit for repayments of prior year income

You can choose either method depending on which helps you the most. If you are itemizing anyways, there might not be a drastic difference and method #1 is certainly easier.

Whichever method you choose, you will also need to make an adjustment on your Indiana state tax return if you were taxed on the disability income in 2020. To do this you will want to look for Repayment of Previously Taxed Income Deduction in the Miscellaneous section under the heading Here's the income that Indiana handles differently. Enter the repayment amount, assuming it was taxed by Indiana in 2020. This should be the same amount you entered in step 6 using the first method for your federal taxes.

[Greg627]

Can you use this same process if the lump sum payment received was for multiple years?  i.e. - Lump sum received in 2024 for years 2022, 2023, and 2024?  And have to repay the LTD company for that same time period?