Tax treatment of Social Security lump sum payment

[2davidc8]

After many rounds of denials and appeals, my wife was awarded a lump sum Social Security disability amount of approx. $70000 which she expects to receive in June this year.  One-third of this amount can be attributed to each of the 3 prior years of 2016, 2017 and 2018.  

In addition, she started receiving regular Social Security disability payments in Jan. of this year.  The total for 2019 will be $25,000.

For better tax planning purposes, I would like to estimate how much of this $70K would be taxable on our 2019 return and whether this lump sum amount affects the taxable portion of her Social Security payments received in 2019.

Is there a way to run this "what-if" scenario in TurboTax?  If so, can someone show me how?  I have any numbers that might be needed from our 3 prior year tax returns.

Finally, I would like to know if we need to amend our 2016, 2017 and 2018 returns.

[Hal_Al]

There is no what if feature with online turbotax . Using the download/desktop versions, you can do multiple trial returns.

I usually refer people to this tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1 But, I don't think it  can handle a SS lump sum.

SS Lump sums, for past years, get special tax treatment, from the IRS. You do not just add the $70K to your 2019 return and pay tax at marginal rates.  Essentially, you calculate tax "as if" you had received it in the year(s) it is designated for. TurboTax can handle that calculation. You need to have copies of your past returns handy. 

You do NOT amend past returns.  The special tax treatment effectively calculates tax "as if" you amended.

[Hal_Al]

There is no what if feature with online turbotax . Using the download/desktop versions, you can do multiple trial returns. Make a copy of your 2018 return.  Give it name like test 2019, so you don't mix it up with your actual 2018 return.  Then modify as needed.

I usually refer people to this tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1 But, I'm not sure if it can handle a SS lump sum.

SS Lump sums, for past years, get special tax treatment, from the IRS. You do not just add the $70K to your 2019 return and pay tax at marginal rates.  Essentially, you calculate tax "as if" you had received it in the year(s) it is designated for. TurboTax can handle that calculation. You need to have copies of your past returns handy. 

You do NOT amend past returns.  The special tax treatment effectively calculates tax "as if" you amended.

[2davidc8]

OK, thanks.

Approximately 1/3 of the $70,000 lump sum (i.e., $23,000), can be attributed to each of the 3 prior years.

So, if in 2016, for example, 85% of my SS benefits were taxable, does this mean that I will have to pay taxes on $20,000 (85% of $23,000) on my 2019 return?

Does if matter if we filed jointly in 2016 and my wife had no SS benefits in that year?

[Hal_Al]

Yes, that's correct. 85% of the $23K will be taxable, at your marginal tax rate.

You spouse having no SS benefits paid, will not change that.

[2davidc8]

Thank you so much.

$6000 of the past-due benefits were paid to her attorney.  I understand that this is deductible in the same percentage that her benefits are taxable.  That is, she should be able to deduct 85% of $6000, or $5100.  But where on the tax return is this deduction taken?  If I understand correctly, all the Miscellaneous Deductions on Sch. A that were subject to the 2% "haircut" went away starting in 2018.  Does this mean the attorney fee is no longer deductible?

Once again, thank you for your help!

[Hal_Al]

That is correct,  the attorney fees are no longer deductible, because of the new law