How to Determine Whether Your Lump Sum Payment Is Taxable

The IRS has put in place a fair method for taxing lump-sum Social Security disability payments.

Because almost every Social Security office in the country has a significant backlog of disability cases, most people who are approved for Social Security disability or Supplemental Security Income (SSI) benefits may not receive their first payment for months, if not years, after filing their original application. The good news is that if you are approved, Social Security will pay you "back-pay benefits" for much or all of the period you have been waiting. This is a one-time fee that can be substantial.

SSDI Backpay Benefits

SSDI payments include a five-month waiting period (they begin the sixth full month after the start date), you are entitled to 10 months of back pay. Social Security usually pays past-due SSDI in a single payment within 60 days of the claim being accepted.

Many people are anxious about the tax implications of receiving this lump sum payout. Is this money taxable? Is there a chance it may put me in a higher tax bracket? Can I use back payments to prior years' revenue if I get payments that have accrued over several years? Accomplish I have to go back and modify past years' returns to do this? Here are a few things to think about while filing your taxes after receiving a lump sum from Social Security.

How to Determine Whether Your Lump Sum Payment Is Taxable

While you may be required to pay taxes on a portion of your Social Security lump sum payment, the IRS does not penalise handicapped beneficiaries who receive all of their past-due benefits in the same year. Individuals can use federal legislation to apportion past-due benefits to previous years, reducing or eliminating the taxable amount of their lump payment each year without having to file amended tax returns.

Every year, Social Security delivers SSA-1099 forms to recipients. If you are receiving this form for the first time, Box 3 should include the exact amount of your lump payment that has accrued over the previous years. Each year, as well as the overall amount paid, will be recorded individually. Rather of requiring you to file updated forms for those years, the IRS allows you to handle everything on your current tax return, using income data from previous years. This technique is covered in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. (With SSI backpay, this is typically not an issue because large payments are paid in three little instalments six months apart.)

While IRS Publication 915 provides a way for estimating how much of your lump sum payment is taxed, the methodology is quite complex and difficult to grasp for the majority of people. It is recommended that you contact a tax professional or purchase tax preparation software after getting your lump sum refund payment from Social Security. While these options are not free, they may save you a large amount of money in taxes.