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.
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