Expert: Kyla Kelim - 8/28/2008

Question
My wife has recieved LTD benefits for about 3 years and now has started SSD benfits. We have to pay back long term the amount SSD is paying,which I understand but my concern is that we payed taxes on 100% of the benefits in the past and now were re-embersed with money that is only taxed at 85%, how do I file or what is the IRS form needed to handle this. Thanks

Answer
You paid taxes on the benefits if your employer paid all of the premiums.  I'm not sure where the 85% figure you cite comes from.  You are paid by an insurance company from their funds.  You are required, under your contract, to reimburse the insurance company when you receive your back pay from social security, but you can take a deduction on your taxes for any amounts paid, and perhaps get a credit.  I found this information on the irs's website:

According to publication 17, chapter 11:  See http://www.irs.gov/publications/p17/ch11.html#publink100032998 :

Disability payments.   You may have received disability payments from your employer or an insurance company that you included as income on your tax return in an earlier year. If you received a lump-sum payment from SSA or RRB, and you had to repay the employer or insurance company for the disability payments, you can take an itemized deduction for the part of the payments you included in gross income in the earlier year. If the amount you repay is more than $3,000, you may be able to claim a tax credit instead. Claim the deduction or credit in the same way explained under Repayments More Than Gross Benefits, later.


Repayment of benefits.   Any repayment of benefits you made during 2007 must be subtracted from the gross benefits you received in 2007. It does not matter whether the repayment was for a benefit you received in 2007 or in an earlier year. If you repaid more than the gross benefits you received in 2007, see Repayments More Than Gross Benefits, later.

Repayments More Than Gross Benefits
In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Do not use a worksheet in this case. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year.

If you have any questions about this negative figure, contact your local SSA office or your local RRB field office.

Joint return.   If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5, but your spouse's does not, subtract the amount in box 5 of your form from the amount in box 5 of your spouse's form. You do this to get your net benefits when figuring if your combined benefits are taxable.

Example.

John and Mary file a joint return for 2007. John received Form SSA-1099 showing $3,000 in box 5. Mary also received Form SSA-1099 and the amount in box 5 was ($500). John and Mary will use $2,500 ($3,000 minus $500) as the amount of their net benefits when figuring if any of their combined benefits are taxable.

Repayment of benefits received in an earlier year.   If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year.

Deduction $3,000 or less.   If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 23.

Deduction more than $3,000.    If this deduction is more than $3,000, you should figure your tax two ways:
Figure your tax for 2007 with the itemized deduction included on Schedule A, line 28.

Figure your tax for 2007 in the following steps.

Figure the tax without the itemized deduction included on Schedule A, line 28.

For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. Then refigure the tax for that year.

Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts.

Subtract the result in (c) from the result in (a).

Compare the tax figured in methods (1) and (2). Your tax for 2007 is the smaller of the two amounts. If method (1) results in less tax, take the itemized deduction on Schedule A (Form 1040), line 28. If method (2) results in less tax, claim a credit for the amount from step 2(c) above on Form 1040, line 70, and enter “I.R.C. 1341” in the margin to the left of line 70. If both methods produce the same tax, deduct the repayment on Schedule A (Form 1040), line 28.

If in doubt, call the IRS.  They are much more approachable than you think.

I hope this helps,

Kyla Kelim