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  1. #1

    Default Taxation of Lump Sum Disability Payments

    What and how do you handle lump sum payments for disability? I was awarded Social Security Disability starting in August 2017. I was given a $11, 000 lump sum check in January of 2018. $3000 of that 11,000 was taken to pay the attorney so I only received a little over $7000.

    My Form SSA-1099 reflects that extra $11,000 in my total benefits for 2018 (Box 5). How do I handle the $11,000 and $3000 on my 2018 income taxes? One of the tax programs says I count it as income but that then shows that I will owe $8000 in federal taxes over what I have paid. Another one says I will owe $4000 over what I have paid. And a third says, they can't do it and I need to contact a tax accountant.

    I called several tax accountants in the area (small rural area) and no one knows how to handle it. One said file an amended 2017, one said count it as income and another said they didn't know.

    My husband and I are both on SS (his regular, my disability). Frankly, we don't have $4000 or $8000 to pay. And why an I paying as much in taxes as I received as a lump sum ? More if you take into account the $3000 that was paid to the attorney.

    My husband and I neither work, have no other income, no investments or no IRA. We onw a home that has a mortgage and 2 20+ year old vehicles. Our sole income is SS.

    I am so confused. Thanks.

  2. #2
    Join Date
    Oct 2014
    Posts
    7,166

    Default Re: Lump Sum Disability Payments

    How much in SSA benefits total did you and your husband received for 2018? What other income do you and your husband have and how much is it? How much if any of your SSA benefits are subject to tax depends on how much SSA benefits you had and what other income you had. I'm surprised, though, that the accountants you contacted did not know the proper way to handle this. If they are tax accountants (and not all accountants are knowledgeable about tax, just as not all attorneys are knowledgeable about tax) this is something that they really should know.

    The basic rule is this: you account for your SSA benefits on your return in the year that you actually receive them. So when you get a lump sum benefit, that entire lump sum is taken into account the year you were paid that lump sum, even if that lump sum includes benefits that were due to you for earlier years. The whole amount of the award you got has to be taken into account even though you ended up paying $3,000 to your lawyer.

    However, there is a special election for lump sum payments that you can make if that election would save you tax. That election allows you to compute the tax owed on part of the benefits as though they had been received in an earlier year, using that earlier year income. It still goes on your 2018 return, but it is a separate computation for the tax on the lump sum that can in some cases bring down the tax you owe.

    IRS Publication 915 explains in great detail how the taxation of SSA benefits works and likely can answer most or all your questions on how this works. The lump sum election is discussed starting on page 10.

    As for the attorney's fee you paid, in years prior to 2018 you could have taken an itemized deduction for an attorney's fee paid to recover taxable income. But the tax act that Congress passed in December 2017 with all those changes you may have read about ended up eliminating that deduction for the years 2018 through 2025. I think that particular change was not really what Congress would have done if it had really considered the issue, but the bill was rushed through Congress to get it done before the end of the year and when Congress rushes things often unintended problems lurk underneath, and this was one of them. So as things stand now, you can't do anything with that attorney's fee to reduce the income you had.

  3. #3
    Join Date
    Oct 2006
    Posts
    15,210

    Default Re: Lump Sum Disability Payments

    Quote Quoting labsmom5
    View Post
    What and how do you handle lump sum payments for disability? I was awarded Social Security Disability starting in August 2017. I was given a $11, 000 lump sum check in January of 2018. $3000 of that 11,000 was taken to pay the attorney so I only received a little over $7000.

    My Form SSA-1099 reflects that extra $11,000 in my total benefits for 2018 (Box 5). How do I handle the $11,000 and $3000 on my 2018 income taxes? One of the tax programs says I count it as income but that then shows that I will owe $8000 in federal taxes over what I have paid. Another one says I will owe $4000 over what I have paid. And a third says, they can't do it and I need to contact a tax accountant.

    I called several tax accountants in the area (small rural area) and no one knows how to handle it. One said file an amended 2017, one said count it as income and another said they didn't know.

    My husband and I are both on SS (his regular, my disability). Frankly, we don't have $4000 or $8000 to pay. And why an I paying as much in taxes as I received as a lump sum ? More if you take into account the $3000 that was paid to the attorney.

    My husband and I neither work, have no other income, no investments or no IRA. We onw a home that has a mortgage and 2 20+ year old vehicles. Our sole income is SS.

    I am so confused. Thanks.
    Taxing matters gave you good advice, but I am going to add some things.

    If your sole income between you and your husband is SS, you should not owe any tax at all. In fact, you shouldn't even have to file a tax return.

    Therefore, either your sole income was NOT just from SS in 2018. Or, you are doing something seriously wrong. 11,000 in SS benefits, even on top of other income, cannot result in 8000.00 worth of tax.

  4. #4

    Default Re: Lump Sum Disability Payments

    We only receive SS income plus about $9600 a year I get from my pension.

    So I really should only have to pay taxes on the pension?

  5. #5
    Join Date
    Oct 2006
    Posts
    15,210

    Default Re: Lump Sum Disability Payments

    Quote Quoting labsmom5
    View Post
    We only receive SS income plus about $9600 a year I get from my pension.

    So I really should only have to pay taxes on the pension?
    Its not quite that simple.


    There is a somewhat complex calculation. However, I can pretty much guarantee That you should not owe anywhere near 8k, and quite likely that you would not owe anything at all. Now, if your insurance is through the Obamacare exchange, and you did not properly estimate your income for the year then you could possibly owe a repayment of your premium tax credit that might be as high as 8k...but even that would be a stretch.

    See a tax professional.

  6. #6

    Default Re: Lump Sum Disability Payments

    They did tell me that they gave me too much credit for my insurance from Marketplace but like $2000

  7. #7
    Join Date
    Mar 2013
    Posts
    16,790

    Default Re: Lump Sum Disability Payments

    Quote Quoting labsmom5
    View Post
    We only receive SS income plus about $9600 a year I get from my pension.

    So I really should only have to pay taxes on the pension?
    Right.

    $9600 in pension as your only other income shouldn't penetrate the threshold that would make any of your SS taxable.

    And with the $24,000 standard deduction between the two of you, you shouldn't be paying any tax at all.

  8. #8
    Join Date
    Oct 2006
    Posts
    15,210

    Default Re: Lump Sum Disability Payments

    Quote Quoting adjusterjack
    View Post
    Right.

    $9600 in pension as your only other income shouldn't penetrate the threshold that would make any of your SS taxable.

    And with the $24,000 standard deduction between the two of you, you shouldn't be paying any tax at all.
    If they got too much premium tax credit from the exchange then that would be different. They could owe the difference between the credit they should have received and the credit they did receive.


    They really need to have a professional run the numbers for them to see where they stand. I do not believe however that they could owe 8k.

  9. #9

    Default Re: Lump Sum Disability Payments

    Got taxes done by tax preparer. Yep, I owe $8134 in federal taxes. Lump sum blew me way over the Marketplace value. I basically have to pay back all of the subsidy they gave me. If I didn't have the lump sum it would not have been as much. So I have to pay back almost all I got in the lump sum for taxes. SUCKS...

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