How to handle return of Social Security benefits paid

On 2/13/2010 3:31 PM, netsmith wrote:

repay.  In January of the following year, you will receive an
SSA-1099 that will reflect the repayment. Box 5 will have a
negative number. How you handle it depends upon whether the
negative amount is $3000 or less. If under $3K, you can take a
deduction on Schedule A Line 23 (subject to 2% AGI limitation).
If the amount is $3K or greater you can choose whichever of the
following two methods provides the best tax benefit:
1. Take a deduction on Schedule A Line 28 (not subject to 2%
limitation) or...
2. Figure 2009 without the deduction and go back in time to
perform a what-if tax calculation for each year you received SSA
benefits that you repaid. Compare each year's what-if calculation
to your actual to find the difference if any. Add up the
differences and subtract the total of the differences from 2009
tax without the deduction.

See IRS pub 915 starting on page 15 where the above is explained.

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In addition to the "claim of right" methods listed above, the 1040
instructions for line 20 say that you first subtract repayments from any
benefits received (even if the repayment pertains to an earlier year).  The
CoR method then applies to the excess of repayments over benefits.  When
repayments are less than benefits, they reduce the taxable amount on line
20b.

1099-SSA box 5 need NOT have a negative number.  Box 4 will be nonzero.

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On 2/14/10 3:03 PM, D. Stussy wrote:

I have the Line 20a/20b instructions in front of me and I don't
see what you allude to. The instructions tell you that Box 3 has
the gross and Box 4 has repayments. It tells you to use the
worksheet to compute taxable amounts except if repayments exceed
gross benefits. It says you have no taxable benefit in that case
and one should go to Pub 915 to see if you can get a deduction or
credit if you ever were taxed on benefits.  The instructions
never mention Box 5, but it will have a negative number if
repayments exceed  gross benefits.  A read of the original post
makes it pretty clear that "Steve" is repaying at least one if
not more prior years. In that instance Box 5 will be negative and
he should go through the calculations if he ever declared SSA
benefits as taxable.

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What you're missing is that the CoR procedure doesn't apply to the entire
repayment (like it does for all other income types).  It applies only to
the excess of repayments over current year benefits.  Such yields a
different result than that of other CoR income types.

SSA doesn't always list repayments in box 4.  Although not recently, I have
had cases where SSA didn't report repayments, the IRS adjusted, and [the
taxpayer and] I prevailed in the subsequent audit.  These cases were in the
1990s.  Fortunately, the SSA issued manual receipts for repayments tendered
at their field offices.

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wrote:

(I was out of town last week, so wasn't able to clarify.)  Thanks to
all for your guidance.  I've looked at the pub 915 instructions, and
my conclusion is that the 2nd method (where the net of all benefits
received and the amount repaid is negative) can be taken as a tax
credit, citing “I.R.C. 1341” in the margin of line 70.  The way I
understand the instruction, the amount should be the equivalent of
what I would get by calculating a refund as if I were filing amended
returns for all the years involved.  That way I only take a credit for
the actual tax paid on the benefits. Correct me if I'm wrong.

I started taking benefits when I became eligible, even though I was
still working, so the tax hit was substantial -- I now know it was a
dubious choice to make.  But it looks like I will be able to recover
from it, with little actual loss.

One further point/question:  I've suspended my benefit now, and will
resume it when I reach age 70 (in 2 years).  So, my plan is (I think)
to make the repayment right before I reach 70 (in Jan 2012).  I would
guess it makes sense to do this in 2011; then I can use the offset
against that year's taxes.  The only positive to net those against
would be my wife's benefit for that year.

========================================= MODERATOR'S COMMENT:
- next time please trim the original post. THX.

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