Some taxpayers may have received a lump-sum benefit payment. The payment could be for the current tax year and for prior tax years.
IRS Form SSA-1099
Box 3 of the taxpayer’s Form SSA-1099 or Form RRB-1099 will include the lump-sum payment. The form will also show the year, or years, of the payment. This additional information will be shown in Description of Amount in Box 3 on Form SSA-1099 or in boxes 7-9 on Form RRB-1099.
Taxable Portion of Social Security Benefits
When figuring the taxable portion of social security benefits, two options are available for lump-sum benefit payments:
- The first option allows the taxpayer to report the whole payment in the year it was received. When the taxpayer chooses this option, complete the Social Security Benefits Worksheet as usual by including the entire lump-sum payment on line 1.
- The second option is to treat the payment as received in the earlier year or years. This is done by figuring whether any part of these benefits is taxable, based on the earlier year’s income. Any part that is taxable is then added to any taxable benefits for the current year and included on Form 1040, line 20b. The taxpayer can elect this method if it lowers the taxable benefits.
Computing Taxable Benefits
Under the lump-sum election method, refigure the taxable part of all the benefits for the earlier year (including the lump-sum payment) using that year’s income, then subtract any taxable benefits for that year that were previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of the benefits for the current year (figured without the lump-sum for the earlier year).
In order to compute the taxable benefits, you will need copies of the taxpayer’s prior year returns. For additional information on the lump-sum election, see Publication 915.
Overview of Lump Sum Social Security Benefit Taxation
Generally, if social security benefits were the taxpayer’s only source of income, the benefits are not taxable and the taxpayer does not need to file a federal income tax return. If the taxpayer received social security benefits and other income, complete the Social Security Benefits Worksheet to calculate the taxable portion.
When figuring the taxable portion of social security benefits, two options are available for lump-sum benefit payments. The taxpayer may report the whole payment in the year it was received or treat the payment as received in the applicable earlier year or years.