How do you minimize taxes on a Social Security lump sum covering 3 years? Over $61k in current year.?

Question

SS disability took 3 years to approve my claim. Then they sent a lump sum that with the remaining monthly payments will exceed anything I ever made in 1 yr. How do I avoid paying excessive income taxes on money that's already been taxed at least twice over? Can I income average this over the 3 yrs it took SS to finally pay me? Some of this has to repay loans I had to make to live while SS was stalling.

Answer 1

If you receive a SSA1099 then your benefits could very well be taxable. First you determine if any of the Social Security Benefits would be taxable if fully claimed in the current year. If so see Publication 915 concerning the Lump Sum Election Method, this method will allow you to use the figures from the previous Tax years to determine if it would have been taxable, or to what extent it would have been in that year.
If using the Previous years numbers would reduce the taxability when compared to the current year, then the Lump Sum Method would benefit you.
Regardless of what method best works for you, to what ever extent it is taxable to you, it will be taxable in the current year.
If any of it is taxable report the full amount of the distribution on Line 20A and the taxable portion on Line 20B and write the letters LES on the dotted line.
It may be that none of your Social security is taxable, but you would want to complete the worksheets for each year to make that determination.

http://www.irs.gov/publications/p915/ar02.html#d0e2528
http://www.irs.gov/pub/irs-pdf/p915.pdf

Answer 2

SS disability is taxable just as regular SS payments are taxable.

Your 1099 shows the payments for each year. As mentioned in another answer, you can re-do your tax returns for each of those years, treating each year's SS payments as being made in the years as shown on the 1099, to see how much of it would have been taxable. From your question, it seems that you had little or no income in those years.

You figure each year, and then total all the taxable benefits for those years, and you use that number instead of using the lump sum in one year (which would be 85% taxable).

Read the worked out example in Publication 915 to see how it is done.

Answer 3

What a great post. Kind of puts it all into perspective doesn't it? Now when I have to pay 15% of my total gross, not just a small part of it to FICA, I will at least know who to thank. We are being taxed to death in this country, and every year, we get a little less for our money. It seems that what we pay has been adjusted for inflation, a lot, considerably more than any adjustment of what is paid out. Survivors and disability benefits have been cut substantially too. I guess they would have to be since we now pay for all the immigrants too. My aunt and grandmother who came to this country in their 30's had reduced benefits, because they didn't get here until their 30's. as a result, when they died in the 80's, they were recieving benefits of 145.00 and 155.00 per month, and had to survive on that and their savings. It was only fair, because they didn't contribute until their 30's. Where did this fairness go? A friend told me about this site that addresses each of these issues. I think it is worth reading.

Answer 4

if this $61K disability is your only income for 2007 you won't pay any tax on it. If you are single, about $2,800. of that $61K would be taxable, but your standard deductions would wipe that out so no tax would be due.
If you are married and you have no other income, none of the lump sum would be taxable.
If you have other income such as wages or interest, that could all change. If you are married and your wife has income , the taxable amount of the disability will increase.
If you are married, you could make up to about $17,000. and pay no tax. (additional above the lump sum)
If single you could make up to $5,500. and pay no tax.
(additional above the sump sum)

As others have explained, if you owe tax, you can figure at a different rate by figuring the disability for each year you are receiving.

Answer 5

SSD is not taxable. So it hasn't "already been taxed at least twice over," it won't even be taxed once.