JFActivist

Figuring Out the Taxability of Retroactive SSDI Payments

Guest Column

By Paul Gada

Welcome to the last in a series of columns discussing timely tax issues for the 2007 filing season. The initial column looked at the new tax rebate and the second column looked at two important tax credits that may benefit those with disabilities. The third column covered whether or not filing a federal tax return is required.

Saving one of the most complicated topics for last, this column explores the tax treatment of lump-sum (retroactive) payments of Social Security disability income (SSDI) benefits. If there is one tax area that SSDI recipients are most likely to trip up on, this is it.

A lump-sum retroactive SSDI award represents a payment that includes benefits calculated for earlier years. You account for the retroactive award in the tax year you get the award. However, do not treat the entire retroactive award as income in the tax year received. If you do, you are making a mistake that will result in you paying unnecessary taxes.

If you received a lump-sum SSDI payment in 2007 that includes benefits for one or more earlier years, it will be included in box 3 of Form SSA-1099.  The form will also break down the benefits to show the year (or years) to which they apply. 

You would account for the entire lump-sum amount received in 2007 (including the portion for 2007 and portions for earlier years) on your 2007 tax return. Under the lump-sum election method allowed by the IRS, no adjustment is made to returns filed in previous years (so don’t file amended returns).

Looking back over the years covered by the retroactive payment, you refigure the taxable part of your benefits for an earlier year using that year’s income. Once you subtract any taxable benefits for the year that you reported before, the remainder will be the taxable part of the lump-sum payment. You would then add it to the taxable part of your benefits for 2007 (calculated without the lump-sum payments for previous years).

Chances are that if you had no taxable income in previous years, these calculations will be fairly easy. The tricky part usually occurs when looking back at years with additional income, perhaps from a spouse or from employment before going on permanent disability.

To figure out the taxable portion of a retroactive SSDI payment for previous years and examples of how this works, you can use the worksheets provided in IRS Publication 915. Doing these calculations by hand, however, can be extremely difficult.

Because of this, it is highly recommended that you invest in some tax prep software or have your taxes prepared by a tax professional. It is worth the price if you do.

At the same time, you should also be aware that this area of the tax law can be so complicated that professional tax preparers and software have been known to make a mistake. Before seeking to use these options, you should first become an informed consumer and taxpayer by reviewing IRS Publication 915 in detail.

Lump-sum Related Tax Deductions

When figuring out the taxability of a lump-sum SSDI payment, keep in mind that there are two important deductions you may be able to take.

First, you can generally deduct the representation expenses that you pay somebody to help you collect your SSDI retroactive award. The expenses for collecting the taxable part of your SSDI benefits are deductible as miscellaneous itemized deductions on line 23 of Schedule A (Form 1040).

Second, if you received disability payments through an employer’s or insurance company’s long-term disability policy and you had to repay the employer or insurance company for any retroactive SSDI disability payments, you can receive a deduction or credit for all or part of the repayments.

If the amount you repay is $3,000 or less, you would claim it as a miscellaneous itemized deduction on line 23 of Schedule A (Form 1040). If your repayments are more than $3,000, follow the methods described on page 15 of IRS Publication 915 and choose the option that results in the least taxes to you.

Fixing Errors with an Amended Return

If it turns out you incorrectly reported a lump-sum SSDI payment, you may want to consider filing an amended tax return.  To do this, file Form 1040X within three years after the date you filed the original tax return or within two years after the date you paid the tax, whichever is later.  However, the deadline for filing an amended return can be suspended for people who are unable to manage their financial affairs.  The instructions for Form 1040X on the IRS web site go into more detail. 

I hope you have found my guest columns for the AAPD blog helpful. Although there will be no further columns this year, I welcome your questions and will answer them as best I can.

Happy tax season!

~Paul Gada is a tax attorney and the personal financial planning director for Allsup, a national provider of Social Security, health care and financial services for those with disabilities.

Copyright, Allsup, Inc.

To File, or Not to File: That is the Question

Guest Column

By Paul Gada

To File, or Not to File: That is the Question

Welcome to another in a series of columns discussing timely tax issues. The initial column looked at the new tax rebate and the second column looked at two important tax credits that may benefit those with disabilities.

As they get closer to the April 15th filing deadline, last-minute tax filers share at least one common thought: Do I really have to file a tax return? The evasive, yet honest, answer to this question is that it depends.

According to the IRS, you must file a tax return if your total income is above a certain level for the year. This is true whether or not you have earned the income from a job or other forms of income, including from Social Security Disability Insurance (SSDI) benefits.

Depending on your filing status and age, most people will have to file a 2007 tax return based on the following income levels:



If your filing status is…          AND at the end of            THEN file a return if
                                             2007 you were*…             your gross income**
                                                                                     was at least…            

SINGLE                                      under 65                                    $8,750
                                                65 or older                                  $10,050

Married filing jointly***            under 65                                    $17,500
                                                65 or older                                 $18,550

Married filing separately          under 65                                    $19,600
                                                65 or older                                 $3,400

Head of household                   under 65                                    $11,250
                                                65 or older                                $12,550


Qualifying widow(er)              under 65                                    $14,100
with dependent child               65 or older                                $15,150


* If you were born on January 1, 1943, you are considered to be age 65 at the end of 2007.

**Gross income means all income you received in the form of money, goods, property and services that is not exempt from tax, including any income from outside the United States (even if you can exclude part or all of it).

*** If you did not live with your spouse at the end of 2007 (or on the date your spouse died) and your gross income was at least $3,400, you must file a return regardless of your age.


Special Considerations for Those Receiving SSDI Benefits

Taxability of SSDI monthly payments, however, receives special consideration.  SSDI payments are treated like regular Social Security payments reported to you on Form SSA-1099. So in general, up to 50 percent of your benefits may be taxable each year, plus all your other income (including tax-exempt interest).

Here is a relatively quick way to check if your benefits may be taxable. First, fill out the worksheet on page four of IRS Publication 915.

When you get through the worksheet, compare the amount on line E to your base amount for your filing status (see below). If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year. If the amount on line E is more than your base amount, some of your benefits may be taxable.

For the 2007 tax year, the base amounts are:

• $25,000 if you are single, head of household, or qualifying widow(er);
• $25,000 if you are married filing separately and lived apart from your spouse for all of 2007;
• $32,000 if you are married filing jointly; or
• $0 if you are married filing separately and lived with your spouse at any time during 2007.

One more thing you should know is that there are situations when more than 50 percent of your SSDI payments may be taxable. Up to 85 percent of your monthly benefits can be taxable in the following cases:

• If the total of one half of your benefits and all your other income for the tax year is over $34,000 if filing single or $44,000 if you are married filing jointly; or
• If you are married filing separately and lived with your spouse at any time during the tax year.

For more detailed information, please consult IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, available on the IRS website. This also would be a good time to consult with a tax preparer or use a tax filing program.

Don’t Need to File a Return? Why You Still May Want to

Even if you don’t have to file a tax return because your disability has forced you to stop working or reduces the amount you make to below the income thresholds, you may still want to do so for several important reasons. Three important ones are:

1. Whether it’s a federal or state income tax return, you want to file if you or your spouse had any income taxes withheld by an employer during the year. Simply put, if you don’t file a return, you will not get a tax refund.

2. You want to file a tax return to take full advantage of any tax breaks or credits available to low and moderate income taxpayers. As discussed in the previous tax column on credits, there are even some credits (like the Earned Income Tax Credit) that are refundable. This means that if you qualify for the credit, your taxes could be reduced to the point that you get a refund instead of owing any taxes.   

3. Even if you haven’t had to file a federal tax return in previous years, filing a 2007 federal tax return is a must in order to get the one-time tax rebate that the federal government is issuing this year. More information on the 2008 tax rebate can be found by clicking here.   

I plan to contribute a guest column next week for the AAPD blog on tax issues impacting individuals with disabilities. I welcome your questions as possible topics to cover in the column. Please post your comments here.

Happy tax season!

~Paul Gada is a tax attorney and the personal financial planning director for Allsup, a national provider of Social Security, health care and financial services for those with disabilities.

Copyright, Allsup Inc.

How Tax Credits Benefit People with Disabilities

Guest Column

By Paul Gada

Available Tax Credits Can Help Individuals with Disabilities

Welcome to the second in a series of columns discussing timely tax issues. The initial column looked at the tax rebate and how to make sure you take the steps needed to get your rebate.  But, rebates aren’t the only way to save on taxes.

In fact, if you are looking for a real world example of the principle of “give and take,” look no further than our federal tax code. Our tax system both takes and returns our tax dollars (through various credits, deductions and exemptions) in a way that is seemingly designed only to confuse the average taxpayer.

The good news is that there are a number of tax credits that are available only to taxpayers with lower incomes or disabilities. The following—the Earned Income Tax Credit and the Saver’s Credit—are two in particular you should know about.

Earned Income Tax Credit (EITC). The EITC was the subject of a reader’s question submitted through this blog.

If you or your spouse earned any taxable income for the year, you may be eligible for the Earned Income Tax Credit (EITC). The most appealing feature of the EITC is that it is a refundable tax credit. This means that if your credit amount is higher than your tax bill, you can actually get the unused part of the credit back as part of a tax refund.

The EITC is part of a federal tax program designed to help low-income workers and families by offsetting the burden of Social Security taxes and providing an incentive to work. Even if you don’t earn enough to owe federal income taxes you may get a refund from the IRS if you qualify for the EITC. If you qualify, it could be worth up to $4,716 for the 2007 tax year.

Even though it sounds too good to be true, it isn’t. In 2007, more than 22.4 million taxpayers received over $43.7 billion in earned income credits by filing their 2006 federal income tax returns. Unfortunately, the IRS estimates that approximately one in four people who could have been eligible failed to claim the EITC.

According to the IRS, the main reason people fail to claim this important tax credit is because they simply don’t know about it. To help solve this problem, here is what you need to know about the EITC.

If you or your spouse were employed for at least part of 2007, you may be eligible for the EITC based on these general requirements:

2007 EITC Eligibility
Maximum Earnings
   
Single               Married Filing Jointly     Qualifying Children         
$12,590             $14,590                            None
$33,241             $35,241                            One
$37,783             $39,783                            Two or more                  

Additionally, to be eligible, your maximum investment income cannot exceed $2,900.   
 

The amount of the EITC itself depends on your income and family size. For 2007, the maximum credit amounts are as follows:

2007 Maximum EITC Amounts

Number of Qualifying Children                Maximum Credit
Two or more                                            $4,716
One                                                         $2,853
None                                                       $428

Based on tables provided by the IRS, the maximum credit amounts are phased in from the first dollar earned. The EITC phases out completely when the earning levels mentioned earlier are reached.

When figuring out your EITC, benefits you receive under an employer’s disability retirement plan (providing pensions to workers who lose their jobs because of disability) are considered earned income until you reach minimum retirement age. According to the IRS, minimum retirement age is considered the earliest age at which you could have received a pension if you were not disabled. The taxable disability payments you claim on line 7 of either Form 1040 or Form 1040A count toward qualifying for the EITC.

However, you should be aware that benefits such as Social Security Disability Insurance, SSI or military disability pensions are not considered earned income that qualify for the EITC. The same is true for payments you received from a disability insurance policy on which you paid the premiums. You or your spouse must have earned income to qualify for the EITC.

There are several ways to determine EITC eligibility and the actual amount of the credit. The hard way is to work through the worksheets and tables provided in the instructions to IRS Forms 1040, 1040A or 1040EZ. An easier way is to use the EITC Assistant tools provided by the IRS that walk you through the entire process. If you elect to do so on your tax return, the IRS can also figure out your EITC for you. If none of these choices work for you, seeking professional tax help is highly recommended because of complexities involved.

Saver’s Credit. For those struggling with the financial hardships caused by a permanent disability, putting away money for retirement may seem like a tough thing to do. However, the reality is that you will need money in later years as well (perhaps even more so than today).

The good news is that there is a way for the federal government to add to your private retirement nest egg through a special tax credit called the Saver’s Credit. This credit is available only to lower-income taxpayers.

Based on the most recent information available, taxpayers claimed more than $900 million in Saver’s Credits on nearly 5.3 million individual income tax returns. The average savings for those filing jointly was $216.

Provided you or your spouse have any earned income, the Saver’s Credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. This credit can be claimed by:

•    Married couples filing jointly with incomes up to $52,000 in 2007 or $53,000 in 2008;
•    Heads of household with incomes up to $39,000 in 2007 or $39,750 in 2008; and
•    Married individuals filing separately and singles with incomes up to $26,000 in 2007 or $26,500 in 2008.

The maximum Saver’s Credit is half of the first $2,000 saved in a retirement account. This means a tax savings up to $1,000 for a single taxpayer earning $15,500 in 2007 and up to $2,000 for married couples earning $31,000 or less. This savings is in addition to any other tax savings for contributing toward retirement.

It is important to note that the Saver’s Credit amount decreases when earnings are above $15,500 for single taxpayers and $31,000 for married couples. This credit is phased out completely above the income levels listed earlier (e.g., $52,000 for married couples in 2007).

To figure out and claim the Saver’s Credit, use IRS Form 8880, Credit for Qualified Retirement Savings Contributions.

Other tax breaks for low-income taxpayers. Depending on your particular situation, there may be many more tax breaks that can take the sting out of filing your taxes and even help your financial situation in the end. To take full advantage of these tax breaks, consider seeking out professional tax assistance or tax preparation software that can help walk you through filling out your tax return.

I plan to contribute a guest column each of the next few weeks for the AAPD blog on tax issues impacting individuals with disabilities. I welcome your questions as possible topics to cover in these columns. Please post your comments here.

Happy tax season!

~Paul Gada is a tax attorney and the personal financial planning director for Allsup, a national provider of Social Security, health care and financial services for those with disabilities.

Copyright, Allsup Inc., used with permission.

Put Money Back in Your Pocket with the Economic Stimulus Payment!

From the National Women's Law Center:

Starting in May 2008, more than 130 million households will receive an economic stimulus payment from the Internal Revenue Service. Most people don't need to do anything special to get a payment; they can just file their taxes as usual and the IRS will do the rest.

But millions of people who are usually exempt from filing tax returns - including low-income retirees, disabled veterans, and low-wage earners - must file a return in order to receive their payment.

The National Women's Law Center hosted a webinar on the economic stimulus payments, which shared information on:

•     Who's eligible for the payments
•     How much the payments can be worth
•     What individuals and families need to do to apply for the payments
•     When individuals and families will receive the payments
•     Tools that can help organizations educate the public

You can watch a recording of the webinar (uncaptioned), or download the slides presented.

In addition, numerous resources discussed during the webinar are available for download on their website.

 

How the Tax Rebate Applies to People with Disabilities

Guest Column
By Paul Gada

This column is the first in a series of columns discussing timely tax issues.

With the April 15th tax filing deadline close at hand, people can use all the help they can get to survive another challenging tax season.

Although most dread dealing with another tax season, there is something good to look forward to this year.   As I’m sure you know, the federal government, via the IRS, is issuing one-time economic stimulus payments to more than 130 million households starting in May.

The amount of the stimulus payment is $300 for qualifying single individuals receiving just Social Security or veterans-disability benefits and $600 for married couples. However, the payment amount could be more for a couple where one individual is also working (up to a $1,200 rebate) or where a single person with a disability had earned other income (up to a $600 rebate). Also, anyone getting a rebate may be eligible to get an extra $300 for each of their children under 17.

To get an estimate of what your stimulus payment may be, use the IRS calculator offered on their site.

The stimulus payments are not taxable and will not affect your 2007 or 2008 tax returns in any way. The IRS also assures the public that the stimulus payments will not count toward or negatively impact any income-based government benefits, such as Social Security benefits, food stamps and other similar programs.

To be eligible to receive a stimulus payment, you must meet three simple requirements:

•    Have a valid Social Security number (SSN);
•    Have at least $3,000 in qualifying income; and
•    File a 2007 federal tax return.

The first requirement is fairly straightforward. Only those with a valid SSN are eligible for the one-time stimulus payment. Those with an Individual Taxpayer Identification Number (ITIN) instead of an SSN are not eligible. If married filing jointly, both must have valid SSNs, otherwise neither can receive the payment. 

The second requirement is a bit harder to meet. Fortunately, the definition of qualifying income is broad and includes earned income from a job, net self-employment income, Social Security benefits such as Social Security Disability Income (SSDI) and veterans-disability payments.

However, Supplemental Security Income (SSI) does not count as qualifying income. Dividends, interest and capital gains income also do not count towards qualifying income.

For most taxpayers, the last requirement is no more a burden than usual. If you normally file a federal tax return from year to year, you will not have to do anything else other than file your 2007 individual income tax return to receive a stimulus payment this year. Payments are calculated and sent automatically by the IRS. No extra forms or applications are necessary.

For many people, however, there is a catch to the third requirement. Specifically, individuals that only receive minimal SSDI benefits or otherwise have low incomes, and who may not generally owe taxes, will need to file a 2007 federal tax return in order to receive the one-time stimulus payment.

If you normally don’t have to file a federal tax return and need to for the stimulus payment, the IRS form for you is the 2007 Form 1040A.  The IRS provides a sample pre-filled Form 1040A on its site to illustrate what’s required of those that normally don’t need to file a return. We’ve also posted an informational Tax Resource Center, which links to this and other documents related to the rebate.

If it doesn’t look like you qualify for this year’s government bounty, take heart. If your circumstances change and you become eligible after you file your 2007 federal tax return, you can still file an amended return using IRS Form 1040X to get the stimulus payment. If you are not eligible this year but become eligible next year, the economic stimulus payment can be claimed next year on your 2008 tax return according to the IRS.

Hopefully, this explains the details so that you may receive the economic stimulus payment you qualify for.

Have Questions?

I plan to contribute a guest column each of the next few weeks for the AAPD blog on tax issues impacting individuals with disabilities. I welcome your questions as possible topics to cover in these future columns. You can post comments here, so others can see what has been asked.

Happy tax season!

~Paul Gada is a tax attorney and the Personal Financial Planning Director for Allsup, a national provider of Social Security, health care and financial services for those with disabilities.

Copyright, Allsup Inc., used with permission.