SSA 1099 lump sum

[jwhuffman]

I received a lump sum payment in 2020 from SSA due to disability that included payment for 2018,2019. I did file a W2 in 2018 and 2019 due to my employer based LTD insurance plans. So, I did pay taxes on the amount in 2018 and 2019. After I received the lump sum....I did have to pay almost all of the lump sum to the employer LTD insurance. How do I avoid being double taxed for the 2018 and 2019 portion included in my 2020 SSA-1099?

[JamesG1 · Accepted solution]

If I understand you correctly, there are two issues to be addressed.

First you appear to have a claim of right issue. 

What year or years did you pay the lump sum to the employer LTD insurance?  That year (or years), you are eligible for a repayment that would create a Claim of Right issue.  See IRS Publication 17 and enter Control F and search for ‘claim of right’.  The repayment credit or deduction would be reported on the current year's tax return.

Second, you received a Social Security lump sum payment.  In TurboTax Online, a Social Security lump sum payment can be computed by following these steps:

• Follow these directions:
• Down the left side of the screen, click on Federal.
• Across the top of the screen, click on Wages & income.
• Under Your income, scroll down to Retirement plans and social security.
• Click on Show more to the right.
• Click on Start/Revisit to the right of Social Security (SSA-1099).
• At the screen Tell us about the benefits you received, enter the information as it is printed on the form.
• At the screen Did you receive any lump-sum payments?, click Yes.
• As an example, the year was 2018 and the amount was $5,000.
• You will have to answer questions about the 2018 tax return.
• Then answer questions about the 2019 tax return.

TurboTax will break down the payments into what amount was received for each preceding year.  You pay taxes on the lump sum in the current year tax return.

See this TurboTax Help.

[jwhuffman]

Thanks for the response JamesG1.

Yes my Employer/Insurance paid me the whole time and I received W2 for 2018, 2019, and 2020. Then when was awarded the SSA Disability backpay, they took almost the whole complete amount.

As you stated, after reading the info you provided, it looks like I would have claim of right.

[DianeW777 · Accepted solution]

Yes, absolutely.  You have two options or methods for the Claim of Right so that you can reduce your income tax.

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 Method: 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.)

1. 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.

[bplenge]

I too had the same issue of the prior year lump sum payment. Thanks to your input I was able to use the credit method for my 2020 return. Next issue is how am I able to take that credit on my state tax return? I live in Minnesota and could not find any possible way to enter it. 

[AmyC]

MN allows you to claim the repayment as well. For full instructions see Repaying Taxed Income Deduction | Minnesota Department of Revenue.

On the desktop version, you can edit the forms. You may need the desktop version depending on your circumstances. You may have already done that for the IRC 1341.