LTD and SSDI back payment and taxes

[taylor4701]

I had to take LTD in 2016. I was forced by the LTD company from my employer to file for SSDI. However, SSDI didn't approve until my eligibility until 2019. I went back to work mid-2019. Today, I received a 2019-1099 for the $44,000 ($7200 from 2016, $22,000 for 2017, and $15,000 for 2018). The back pay from SSDI was $44,000 of which $6000 went to an attorney and the remaining $38,000 was paid back to the LTD company. It seems like I will have to pay income taxes on the entire $44,000. Is that what is happening here? I don't have that kind of money laying around. I'd have to ask for a payment plan. I am so worried about this. 

I appreciate any information/guidance. I've been with Turbo Tax for many years and appreciate their support.

[Hal_Al]

The $44,000 is potentially taxable. More accurately up to 85% of it is potentially taxable. More likely, it will be a lot less.

Tax on Lump sum social security payments (including SSDI) are calculated under a special formula that treats the income as if it had been received in the years designated (2016, 2017 and 2018 in your case). So, chances are the tax will be low or even 0, if you had little or no other income*, in those years.  TurboTax (TT) can handle the SSDI lump sum calculation. Unfortunately, the $6000 attorney fee is not deductible. 

I assume the LTD was tax free. If not, there is a 2019 deduction or tax credit for the repayment made in 2019, so that you will not be double taxed. 

*Social security only becomes taxable when added to sufficient other income. ISocial security (including SSDI) becomes taxable when your income, including 1/2 your social security, reaches:

Married Filing Jointly(MFJ): $32,000

Single or head of household: $25,000

Married Filing Separately and lived with your spouse at any time during the tax year: $0

[taylor4701]

Thank you. Referring to my income in the years 2016-2017, would my husband's earnings be considered as part of my earnings since we file "married filing jointly"? I am only looking at those two years because he had massive stroke in late 2017 and now on SSDI (sadly after working  22 years w/same company).

Thank you, again . 

[Hal_Al]

Yes, when filing Married Filing Jointly (MFJ), both spouse's income are included when calculating the $32,000 threshold for SSDI being taxable.  

You may be wondering if  filing Married Filing Separately (MFS) is going to save you money, because you won't have to add your spouse’s income to your return. It usually won't. There is a special rule that says SS becomes taxable at zero ($0) other income when Filing as MFS. The doubled standard deduction, for MFJ,  will usually wipe out most of the spouse’s income, on a joint return. But you will still get the use the lower joint filing rates.

[taylor4701]

Thanks. My thought process was that things are going to look even more awful for us since we MFJ. We will be filing that way way again this year. Time will tell.

Thanks again.