Lump Sum SS Correction

[hvsteve]

In 2011 my wife, who has been on SS disability for many years and is
now on retirement, received a rather large single payment check from
Social Security. The best she could find out from them, as there was
little documentation with the check, was that it was to correct long
time underpayments which were discovered. When she called, she was
told that the check was correct and it was hers. She could not get any
information on what periods it covered.

In doing our 2011 taxes (with Turbotax), she finds the form wanting
her to allocate the payment to what years were covered and how much
for each year, I assume for income averaging. I believe the averaging
only goes back to 2008. This check may represent a total of small
amounts going back to the 1990s or even earlier, as her disability was
on and off several times. How do we handle this?

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[Alan]

On 5/19/12 11:39 AM, hvsteve wrote:
> In 2011 my wife, who has been on SS disability for many years and is
> now on retirement, received a rather large single payment check from
> Social Security. The best she could find out from them, as there was
> little documentation with the check, was that it was to correct long
> time underpayments which were discovered. When she called, she was
> told that the check was correct and it was hers. She could not get any
> information on what periods it covered.
>
> In doing our 2011 taxes (with Turbotax), she finds the form wanting
> her to allocate the payment to what years were covered and how much
> for each year, I assume for income averaging. I believe the averaging
> only goes back to 2008. This check may represent a total of small
> amounts going back to the 1990s or even earlier, as her disability was
> on and off several times. How do we handle this?
>

Whenever the SSA sends you benefits that include back payments, the
amount by year is highlighted on the annual Form SSA-1099 that is sent
to very recipient in January. Have you looked at the 2011 SSA-1099? The
amount in Box 3 (also Box 5 if there were no repayments by the
recipient) would reflect the total gross benefits including prior years.
Right below Box 3, SSA should have provided a description of the
payments. This description would tell you the year by year amounts. If
the yearly amounts are not there, you will have to call or visit the
nearest SSA office to obtain the amounts by year. However, you will only
need the annual amounts if you elect not to use the total amount
received in 2011 in computing the annual tax bill.

Tax law allows you to calculate your 2011 tax bill by either including
the full amount in 2011 or performing a "what-if" calculation. This
what-if calculation, requires that you go back in history, take each
year's tax return covered by the back payments and recompute the taxes
for each year as if the SSA benefit change had actually been received in
that year. You look at 2011 taxes with the full payment included and you
compare that to 2011 with only 2011 benefits included plus the annual
changes for each year back in history. Use the calculation with the
smallest tax bill.

All of this (with worksheets) is explained in IRS Pub 915 starting on
page 11.

http://www.irs.gov/pub/irs-pdf/p915.pdf
--
Alan
http://taxtopics.net