Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  My client just received a lump sum payment from the Social Security administration in January 2013 representing retirement back pay for 2011 and 2012.  In which year is the payment taxable?

Answer:  According to the IRS website Social Security back pay is taxable in the year in which it is received:

You must include the taxable part of a lump-sum payment of benefits received in the current year (reported to you on Form SSA-1099) in your current year’s income, even if the payment includes benefits for an earlier year.

However, there are two ways to determine the amount of income to include:

• You can use your current year’s income to figure the taxable part of the total benefits received in the current year. OR

• You may make an election to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year.

You can select the lump-sum election method if it lowers the taxable portion of your benefits.

• Under this method you refigure the taxable part of all your benefits (including the lump-sum payment) for the earlier year 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 the current year (figured without the lump-sum payment for the earlier year).

• There are worksheets in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to help you calculate the taxable portion using this method.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.