Repayment of Lump Sum - SSA 1099

[ThinSixty]

Hello

I received a lump sum payment from Social Security in 2021, for years 2020 and 2021.  The lump sum increased our 2021 gross income and significantly increase the tax due, by thousands of dollars.  We paid the increased tax.  In 2022, I paid back my long-term disability company with the lump-sum.

The lump sum payment was SSDI.  The disability company collected taxes for the payments they paid me.

Using the Claim of Right on the 2022 return, we are not seeing a proper “refund” of the tax paid for 2021.   We have tested using the credit method or the income reduction method.  I think we have applied both correctly, but the refund amount is nowhere near what we paid out for 2021.

What is the best way to declare the repayment and regain the taxes we paid out for 2021?

=======  UPDATE  ===========

In "trying things" with TurboTax, the refund amount has greatly changed in my favor.  So much so, I think it must be wrong.

For the Claim of Right, there are two key numbers I've focused on.  Please tell me if it's correct.

On the Sched A form, in Other Itemized Deductions, line 16, Turbo has entered Cliam Repayments and the amount $30,000. 

On the Sched 3 form, Part II - Other Payments and Refundable Credits, line 13d, $30,000 was entered.

While I'm liking the refund amount I'm seeing, I'm assuming it's incorrect. I guess there can only be a deduction or a credit, not both. But Turbo is not correcting it.

What is the correct way to do the Claim? And, going back to the original question, get back the extra tax money I paid out last year.

We are using the TurboTax Deluxe.  We are doing an Itemized deduction.

[fanfare]

you have to itemize to submit claim of right over 3000.

If you don't have enough other itemized deductions, you will not recover.

@ThinSixty 

[ThinSixty]

I have itemized.

[DianeW777]

First, you have the lump sum of social security in 2021 and then you also have the repayment.  If the repayment occurred in 2022 follow the instructions below since the lump sum payment was reported in 2021.

Keep in mind the deduction cannot be more than the amount of social security that was included in your taxable income in the prior year.  

If the repayment is greater than $3,000 you have two options (option 2 is most common).

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 2021.
     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 2021 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.
7. See image below

Taking the credit in TurboTax (less common)

There are two components to taking the credit in TurboTax. The first part requires 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 E Claim of Right, IRC 1341 credit for repayments of prior year income.  (Schedule 3 and zoom right to the worksheet and easily entered)
5. Click on the Step-by-Step icon in the upper right corner to return to the interview mode and finish working on your tax return. 

@ThinSixty 

[ThinSixty]

Thank you.  I think we are going with the credit.  That method seems best to get back the taxes paid.

Following your steps:

1) Using the 2021 Turbo (which we hadn't deleted), we found the tax due amount (say $19000).

2) We removed the lump-sum from the income, and Turbo gave us a new tax due amount (say $8000)

3) The difference is $11000 (19k - 8k)

4) Using the 2022Turbo, we entered the $11k in the form, section Other Credits and Payments Smart Worksheet.

Turbo recalculated the new numbers.  Have I missed something?