I am working the different solutions at this time and am losing earned income credit of nearly $2500 following the Schedule A Deduction. It also made more of my SSD payments taxable. It also is still not evident to me how I am going to recover the taxes I paid on the money when I actually got it. Turns out it isn't a matter of adding it in one column and removing it from another.
Our best advice to you still is to seek help with a local tax pro in your area, showing him all correspondence from the insurance company relating to their "withholding" payments for the pay back, etc, their letters of explanation, etc.
I have a client who in 2009 had to pay back amounts in just such a case as yours. In his case he went ahead and wrote the check, so it will be dealt with as per publication 525. However if he had not done so, I suppose he would also be getting a W2 from the insurance company.
ChEAr$, Harlan Lunsford, EA n LA
That $24000 never existed?
When you get a W2, some money has been paid to you in checks. Some has been paid to your account for income tax withholding, FICA, medical insurance, etc. But it has all been paid to somebody. In this case, much of the W2 total has not been paid, and was not offered to be paid, to anybody.
That W2 I assumeD also represents expense to the insurance company, that reduces their income tax. Now maybe it does not, and so the insurance company may not actually getting a windfall. I am inferring you are saying that the W2 does not necessarily represent an expense for the insurance company for income tax purposes.
The car insurance did not send me a W2, and the IRS did not consider the money as taxable income to me.
What stops the annuity insurance company in the case from issuing a corrected W2 for the earlier year? Would it be forbidden by law?
Suppose this person had converted an IRA to a Roth, and this phantom income drove him over the MAGI line?
So he has the same money on his AGI line for two years? Suppose he does not itemize.
Had he repaid the $24,000 with a check in 2009, would they have been obligated to give him a corrected 2008 W2?
No, they paid it to him. When SSA finally approved his claim and paid him a lump sum, he was obligated to pay the disability insurer back. He didn't. So they are taking it out of current payments.
He got the money in advance, if you will. He is now paying it back through garnishment, if you will, of his current payments.
It's a wash for the insurance company. $24K paid out, $24K refunded. The only windfall was to our OP, who got (using Seth's made up numbers), what amounts to a $24K interest-free loan against his future payments.
Like anyone else, he could recharacterize his conversion to undo it.
-Mark Bole
He'd be foolish not to itemize if his itemized deductions, including the claim of right deduction, was greater than his standard deduction. But the alternative of a credit may be a better deal. The only way to tell is to run the numbers both ways.
No. Please go back and re-read the paragraph from Pub 915 that I previously posted.
-Mark Bole
I know you know that he is getting more income reported on his W2s and SSA-1099 than he got, however you allocate the money. So whatever the money reported as paid to him minus what he actually got is what I see as phantom money. You could call the difference what you wish.
Unlike everybody else with the same income (assuming certain levels other income that we could incorporate into the example), he would be forced to recharacterize.
I understand that you are describing the view of the law, and that you don't actually confuse that with reasonableness or fairness.
I'm with Harland and Art on this one - you've gotten some guidance here that I believe is correct and sound, that you don't understand it or want to accept it doesn't change it (I am NOT trying to sound like a hardA**).
I know it doesn't sound fair and it may not be fair, sadly fairness and logic have little place in the tax code.
What you NEED to do is to sit down with a tax pro (EXPECT TO PAY A FEE) and have them explain it to you so you can understand. Your other alternative, and I do NOT recommend it, is to make an appointment with an IRS office and ask them to explain the intricacies to you. I don't recommend this because it is very likely that you'll get someone at the IRS that doesn't understand it any better than you do.
Your only viable option is to hire a pro - maybe see if there is a Volunteer Income Tax Assistance Center near you OR contact the nearest law school. Many times the law schools have free tax clinics for low income taxpayers.
The one thing you can bet on is this - this is NOT going to go away simply because you think it isn't right. Your choices at this point are to roll over or prove them wrong and it isn't likely you'll be able to prove them wrong on your own (otherwise you'd have done so by now).
Sorry, Gene E. Utterback, EA, RFC, ABA
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