Social Security Disability Backpay AND Income Continuation Insurance

[morgangiroux]

Hi. My husband received social security disability backpay in 2024. It included payments from 2022-2024 when we applied. While we were waiting to get approved, his income continuation insurance paid us. However, then we got approved, got the SS backpay, and had to reimburse the insurance company for approximately $40,000 overlap.

Our 1099K from Social security states the income with back pay. However, it doesn't account for the part we had to pay back so we are getting taxed twice on that income. I've read a little about how you can put the double payment as a claim reimbursement deduction. Is that the best way to account for the $40,000 extra income?

Thanks.

[RobertB4444]

Yes.  You can claim a reimbursement deduction for any income that you were previously taxed on that you have to pay back.  So go ahead and enter the 1099-SA just as you received it.  The system will ask you about lump sum payments that you received and you will tell it all about the extra social security you received for 2022 and 2023.  Then you will need to enter your income from 2022 and 2023 to see how much of the lump sum is taxable.

Then you can claim a deduction for the full amount that you repaid that was taxed in prior years.  Make sure that you check your prior year returns to see what the amounts that were paid to you were.  If it was the full $40,000 then you get a credit for that amount.  If you paid tax on a lesser amount then you can take a credit for that.  Enter it as a miscellaneous income amount in a negative number in the miscellaneous income section at the very bottom of the wages and income section of your federal return.

@morgangiroux 

[morgangiroux]

Thanks for your answer. When i enter the amounts SS paid for each year listed on the 1099K, i think turbotax is already computing the amounts based on each year.  

I'm confused about entering it as miscellaneous income in negative amount. I thought this was to be put as a deduction.

[ThomasM125]

Since you are paying back income taxed in previous years, you need to report a claim of right to get a tax benefit in the current year. You can enter an itemized deduction for the amount repaid or enter a credit equal to the tax you paid on the income in previous years.

To report a claim of right repayment credit in TurboTax follow these instructions:

1. Using the desktop version of TurboTax, bring up the "Forms" mode by clicking on that icon on the menu bar
2. Choose the 1040/1040SR Wks in the list of forms
3. Scroll down the 1040/1040SR Wks until you see Schedule 3,  Part II - Other Payments and Refundable Credits 
4. Enter the amount of the credit on line 12 (D) Claim of Right, IRC 1341 credit for repayments of prior year income

You may need to amend your previous year(s) tax return to determine the change in tax. You will see on option for this on your home page in TurboTax, under Your tax returns and documents at the bottom of the page. You will not file the amended return, you just need to remove the income that was paid back to determine the tax you paid on it. It will be the difference in tax due or refunded when you remove the income you paid back.

You can download your online TurboTax program to your computer so you don't have to re-enter all of your information. You will see an option for that on your left menu bar while working on your program in TurboTax. Look for the Tax Tools menu option, then Tools, then see the option on the right to  Save your (year) return to your computer.

Income repayment of less than $3,000 can only be deducted as a miscellaneous itemized deduction, which is not allowed for tax years beginning after 2017 through 2025. If the amount is over $3,000, it is entered on line 16 of Schedule A (Itemized Deductions) as an Other Deduction if you want to take the deduction in the current year, as opposed to the credit.