Received SSDI lump sum and want tp pay the taxes on it now

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RMD3819
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Received SSDI lump sum and want tp pay the taxes on it now

Post by RMD3819 » Wed Oct 09, 2019 8:30 am

Wife received $62K retrocactive SSDI payment in a lump sum.

I want to pay the tax on it now and avoid the hit at tax time. I have read 1040-ES and am confused if this is the appropriate form or not. If the advice is to wait I need to know how to figure the amount I should hold separately.

Last year 1040 line 6 was $87K if that helps in determining how much we owe to the IRS.

Help please.

Gill
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by Gill » Wed Oct 09, 2019 8:33 am

Why pay it six months early? Set aside $15,000 for next April and you’ll be fine
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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HueyLD
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by HueyLD » Wed Oct 09, 2019 8:49 am

RMD3819 wrote:
Wed Oct 09, 2019 8:30 am
Wife received $62K retrocactive SSDI payment in a lump sum.

I want to pay the tax on it now and avoid the hit at tax time. I have read 1040-ES and am confused if this is the appropriate form or not. If the advice is to wait I need to know how to figure the amount I should hold separately.

Last year 1040 line 6 was $87K if that helps in determining how much we owe to the IRS.

Help please.
You can elect the lump sum method to report your SSDI by allocating prior year's benefit to prior year's tax calculation.

See IRS Pub 915 for worksheets under the "Lump-Sum Election." It can save you a lot of taxes. If you don't understand this method, seek professional help.

MathIsMyWayr
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by MathIsMyWayr » Wed Oct 09, 2019 9:37 am

How is SSDI taxed? Is it taxed just like a regular SS benefit, e.g., maximum of its 85% as an ordinary income? Any special provisions? I am curious.

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HueyLD
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by HueyLD » Wed Oct 09, 2019 9:39 am

Taxed just like any SS benefit.

HomeStretch
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by HomeStretch » Wed Oct 09, 2019 9:44 am

+1 to paying the $15k at tax time. In a 2% high yield account, you will earn about $140 in interest income.

tomd37
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by tomd37 » Wed Oct 09, 2019 1:22 pm

RMD3819
How many prior years is the lump sum payment applicable to? HueyLD is correct that you need to learn more about this matter via Pub 915. :dollar
Tom D.

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RMD3819
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by RMD3819 » Wed Oct 09, 2019 3:22 pm

tomd37 wrote:
Wed Oct 09, 2019 1:22 pm
RMD3819
How many prior years is the lump sum payment applicable to? HueyLD is correct that you need to learn more about this matter via Pub 915. :dollar

October 1, 2016<———This is the date on the award letter that states the disability began.

tomd37
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by tomd37 » Wed Oct 09, 2019 4:10 pm

RMD3819,
I don't know what is going on with the system, but this is the third time I have written a response and attempted to send it.

Now that you have provided additional information that this lump sum payment in 2019 covers three additional prior years (2016 thru 2018), my thinking currently is that you should look into the matter of possibly modifying your prior year federal tax return to include the SSDI income applicable to those years in the appropriate year. I think, but am not sure, that this is the proper way to go. Maybe, now with the additional information, others will respond with comments.

If this turns out to be the proper way to go, be sure to start with a modification to your 2016 federal tax return as it can only be amended up to April 15, 2020. You have additional time to amend the 2017 and 2018 federal tax returns. I cannot address any state tax implication, if any, as I am not familiar with your state returns if any.

If there are more knowledgeable people out there on this matter please respond with guidance. I surely hope you do not have to pay federal tax on the full SSDI amount in tax year 2019.
Tom D.

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FiveK
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by FiveK » Thu Oct 10, 2019 12:20 am

tomd37 wrote:
Wed Oct 09, 2019 4:10 pm
Now that you have provided additional information that this lump sum payment in 2019 covers three additional prior years (2016 thru 2018), my thinking currently is that you should look into the matter of possibly modifying your prior year federal tax return to include the SSDI income applicable to those years in the appropriate year. I think, but am not sure, that this is the proper way to go.
Good thought, but the IRS won't allow it.

As others have noted, see Publication 915, in which one finds "You must include the taxable part of a lump-sum (retroac-tive) payment of benefits received in 2018 in your 2018 income, even if the payment includes benefits for an ear-lier year."

If one likes doing IRS worksheets by hand (or coding them in spreadsheets), instructions are in that publication. Or it might be worthwhile to have commercial tax software ask the leading questions....

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8foot7
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by 8foot7 » Thu Oct 10, 2019 6:53 am

If your wife is on disability then presumably at least her chances at more income are limited. I would therefore not turn down the opportunity to make the $150 or so in interest that money you have allocated for taxes would accrue in a proper savings account between now and April 15. That’s an electric bill around here.

Topic Author
RMD3819
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by RMD3819 » Sat Oct 12, 2019 8:17 am

I have taken the advice and moved $15K into a CD.

After looking at pub 915 I will wait until tax time and start doing the worksheets when we get the 1099.

Thanks for all the help.

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dodecahedron
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Re: Received SSDI lump sum and want tp pay the taxes on it now

Post by dodecahedron » Sat Oct 12, 2019 8:48 am

MathIsMyWayr wrote:
Wed Oct 09, 2019 9:37 am
How is SSDI taxed? Is it taxed just like a regular SS benefit, e.g., maximum of its 85% as an ordinary income? Any special provisions? I am curious.
Yes, a maximum of 85% in ordinary income.

BUT the main issue specific to SSDI is that the Social Security Administration often takes years to determine that the applicant is disabled. (Disability is often a harder qualification criterion to determine than someone´s age or marital status, for example.) This can result in a large initial year payment that ultimately covers several years worth of retroactive SSDI.

The standard formula for computing the taxable amount of SS would tax a higher percentage of that first year payment than if the retroactive payments had been received in the actual years in which they were due. There is a complicated optional worksheet (alluded to above) which attempts to adjust the computation of taxable SS to somewhat mitigate that unfortunate effect.

Unfortunately, the optional worksheet does not necessarily work out to be quite as good as it would be if the recipient were allowed to just amend the prior year returns. (One can also construct hypothetical scenarios where the optional worksheet works out better than amending the prior year returns would have.)

But it is what it is. Amending prior year returns is not allowed. The optional lump sum worksheet method at least helps some vs. just treating the entire $62K as if it were normal SS benefits.

And yes, the SSA-1099 will spell out exactly how much of each part of the $62K was attributable to 2016, 2017, 2018, and 2019 tax years. Tax software should easily handle this pretty easily.

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