If you receive lump sum Social Security benefits, you may be able to reduce the federal income tax you owe on those benefits. You might receive lump sum Social Security benefits if you were previously receiving Supplemental Security Income (SSI) payments and the Social Security Administration subsequently determined that you should have been receiving Social Security disability benefits. Or you may have applied for Social Security benefits and were denied, but after an appeal you were awarded a lump sum payment.
If you receive lump sum Social Security benefits, they will be reported on Form SSA-1099. Whether any of your Social Security benefits are taxable depends on the total amount you receive, combined with your other income. Normally, if you receive Social Security benefits monthly and you have little or no other income, you benefits would not be taxable.
According to the IRS, to determine whether any of your benefits are taxable, you take one-half of your benefits plus all your other income, including tax exempt interest. If the total is more than the base amount for your tax filing status, a portion of your Social Security benefits is taxable.
The base amounts in effect for 2011 are $25,000 if you are single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for the entire year, and $32,000 if you are married filing jointly. If you are married filing separately and you lived with your spouse at any time during the year, your base amount is $0.
Generally, if your total is over the base amount, 50% of your Social Security benefits are taxable. But according to the IRS, you would be subject to tax on 85% of your benefits if the total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if married filing jointly) or if you are married filing separately and lived with your spouse at any time during the year.
When you receive lump sum benefits, your total may put you over the base amount and you could owe income tax. But the IRS allows you to spread the taxes on lump sum benefits over the previous tax years to which they apply. You can do this on your current year return and do not have to file amended returns.
According to the IRS, if you elect to use the lump-sum method, you refigure your taxable benefits for a prior year, including the lump sum payment, using that year’s income. Then you subtract the taxable portion of your benefits from that year that you previously reported, and the difference is the taxable portion of the lump sum payment applicable to the prior year. You add that amount to the taxable portion of your benefits for the current year.
You can find examples and worksheets to make this calculation in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. At the end of worksheet 4 in this publication, it shows you how to elect this lump-sum election. But, as indicated by Eva Rosenberg in an article on MarketWatch, if you use TurboTax to prepare your return and you answer the questions regarding Social Security income, the software will make the calculations for you.
