Generally, a lump-sum (or retroactive) payment of social security benefits (shown on either Form SSA-1099 or Form RRB-1099) is included in the taxpayer’s total benefits in the year received.
Taxing Lump-sum Social Security Payments
This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax. if some or all of the payment pertains to a prior year, the taxpayer can elect to determine the taxability of such benefits based on the prior year’s income and laws in effect for that year. Social Security benefits are included in gross income when the taxpayer’s income exceeds a certain level, the base amount. Generally, the income is included in the year it is received.
When do you receive Lump-Sum Social Security Payment?
When a person initially applies for Social Security or disability benefits, approval is often delayed for a year or more. In these cases, the first payment may be a lump-sum which exceeds the base amount and generates a tax liability. Congress has provided an election which may offer relief to taxpayers who receive a lump-sum payment, § 86(e).
Generally, you use your 2013 income to figure the taxable part of the total benefits received in 2013. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.
Under the lump-sum election method, you refigure the taxable part of all your benefits for the earlier year (including the lump-sum payment) using that year’s income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for 2013 (figured without the lump-sum payment for the earlier year).
Any benefits taxable under this election are added to current-year taxable benefits and included in the current year’s return.In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Do not use Worksheet 1 in this case. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year.
Benefits of Lump Sum Election
In general. For purposes of this section, the amount of social security benefits received during any taxable year shall be reduced by any repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not such benefit was received during the taxable year).
This has two possible effects, depending on the timing of the repayment. If repayment occurs in the same year the benefits were received, the taxpayer may deduct the amount of the repayment from the benefits received. If repayment occurs in a year following the receipt of the benefits, the taxpayer may deduct the amount of the repayment from the benefits received in the year of repayment. Note, the deduction is not against the benefits that have been repaid, but against benefits received in the same year as the repayment.