You must include the taxable part of a lump-sum (retroactive)
payment of benefits received in 2001 in your 2001 income, even if the
payment includes benefits for an earlier year.
This type of lump-sum benefit payment should not be confused with
the lump-sum death benefit that both the SSA and RRB pay to many of
their beneficiaries. No part of the lump-sum death benefit is subject
to tax.
Generally, you use your 2001 income to figure the taxable part of
the total benefits received in 2001. However, you may be able to
figure the taxable part of a lump-sum payment for an earlier year
separately, using your income for the earlier year. You can elect this
method if it lowers your taxable benefits.
Under the lump-sum election method, you refigure the taxable part
of all your benefits for the earlier year (including the lump-sum
payment) 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 2001 (figured without the lump-sum payment for
the earlier year).
Since the earlier year's taxable benefits are included in your 2001
income, no adjustment is made to the earlier year's return. Do
not file an amended return for the earlier year.
Will the lump-sum election method lower your taxable
benefits?
To find out, take the following steps.
- Complete Worksheet 1 in this publication.
- Complete Worksheet 2 and Worksheet 3
as appropriate. Use Worksheet 2 if your lump-sum payment
was for a year after 1993. Use Worksheet 3 if it was for
1993 or an earlier year. Complete a separate Worksheet 2 or
Worksheet 3 for each earlier year for which you received
the lump-sum payment.
- Complete Worksheet 4.
- Compare the taxable benefits on line 18 of Worksheet 1
with the taxable benefits on line 20 of Worksheet 4.
If the taxable benefits on Worksheet 4 are lower
than the taxable benefits on Worksheet 1, you can elect to
report the lower amount on your return.
Making the election.
If you elect to report your taxable benefits under the lump-sum
election method, follow the instructions at the bottom of
Worksheet 4. Do not attach the completed worksheets to your
return. Keep them with your records.
Once you elect this method of figuring the taxable part of a
lump-sum payment, you can revoke your election only with the consent
of the IRS.
Lump-sum payment reported on Form SSA-1099 or
RRB-1099.
If you received a lump-sum payment in 2001 that includes benefits
for one or more earlier years after 1983, it will be included in box 3
of either Form SSA-1099 or Form RRB-1099. That part of any
lump-sum payment for years before 1984 is not taxed and will not be
shown on the form. The form will also show the year (or years) the
payment is for. However, Form RRB-1099 will not show a breakdown
by year (or years) of any lump-sum payment for years before 1999. You
must contact the RRB for a breakdown by year for any amount shown in
box 9.
Example
Jane Jackson is single. In 2000 she applied for social security
disability benefits but was told she was ineligible. She appealed the
decision and won. In 2001, she received a lump-sum payment of $6,000,
of which $2,000 was for 2000 and $4,000 was for 2001. Jane also
received $5,000 in social security benefits in 2001, so her total
benefits in 2001 were $11,000. Jane's other income for 2000 and 2001
is as follows.
|
Income |
2000 |
2001 |
| Wages |
$20,000 |
$ 3,500 |
| Interest income |
2,000 |
2,500 |
| Dividend income |
1,000 |
1,500 |
| Fully taxable pension |
|
18,000 |
| Total income |
$23,000 |
$25,500 |
To see if the lump-sum election method results in lower taxable
benefits, she completes Worksheets 1, 2, and 4
from this publication. She does not need to complete Worksheet 3
since her lump-sum payment was for years after 1993.
Jane completes Worksheet 1 to find the amount of her
taxable benefits for 2001 under the regular method. She completes
Worksheet 2 to find the taxable part of the lump-sum
payment for 2000 under the lump-sum election method. She completes
Worksheet 4 to decide if the lump-sum election method will
lower her taxable benefits.
After completing the worksheets, Jane compares the amounts from
line 20 of Worksheet 4 and line 18 of Worksheet 1.
Because the amount on Worksheet 4 is smaller, she chooses
to use the lump-sum election method. To do this, she prints "LSE"
to the left of line 20a on Form 1040. She then enters $11,000 on line
20a of Form 1040 and her taxable benefits of $2,500 on line 20b.
Jane's filled-in worksheets (1, 2, and 4) follow.
Jane's Worksheet 1
Jane's Worksheet 2
Jane's Worksheet 4
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