Tax on Lump Sum

  Today TaxMama hears from Cindy in the TaxQuips Forum with some great news. “I have recently been approved for disability through Social Security.  I will receive a lump sum (retroactive back to the date I became disabled) as well as start receiving a monthly check. Is the lump sum taxable, and if so, at what percentage (tax bracket?) will it be taxed?  The amount is over $50,000.  Will I be expected to pay taxes on the monthly disability checks I receive in the future, and if so, how much?  Or, will the taxes be automatically deducted from my check before I receive it?  (I file as single.)”

Dear Cindy,

Congratulations!

It’s pretty hard to the Social Security Administration (SSA) to accept your disability. Clearly, from the lump sum amount, it has taken you about 3 years or more.  

I have great news for you. There is a special calculation to use when you get a lump sum payout from the SSA. IRS has a worksheet in Publication 915. If you plan to prepare your own tax return, be SURE your software handles these SS Lump Sum payments. If not, keep shopping – or go to a tax pro who understands how to handle them. In fact, being disabled, you may be eligible for free help from VITA or AARP Tax-Aide.

As to your second question – will the monthly payments be taxable in the future? It all depends.

a) If this is your only source of income? Then, NO!

b) If you have other income, there is a computation.

You add half your SS benefits to all your income, including your tax-exempt interest. If it adds up to more than $25,000 (single) or $32,000 (MFJ), then up to 80% of the amount over the limits will be taxable. All tax software handles this computation correctly. No worries, here.

 

So unless you have a lot of other income, like a pension or investment income, you won’t owe any taxes.

And remember, you can find answers to all kinds of questions about the new reporting rules, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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