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Financial Planning / Tax Strategies


Subject:  Re: soc. sec. mess Date:  6/30/1997  12:21 PM
Author:  TMFTaxes Number:  65 of 124585

<<My question, is there anything my parents can do to get the taxes back on the $30,000 without a mountain of paperwork and without being blacklisted by either social security or the IRS? (the last thing they want to do is 'rock the boat')>>

Well, this can get pretty complicated, Brent. You may need a qualified tax pro to walk you through it. But I'll give you the best information that I can with a limited understanding of the situation.

First, lets look at how to handle the situation if past overpayments are repaid by reducing CURRENT social security benefits.

The amount of social security benefits a taxpayer receives during any tax year is reduced by any repayment the taxpayer makes during the year of social security benefits the taxpayer had previously received. It doesn't matter whether the repayment is for overpayments that the taxpayer received during the repayment year or during any earlier year. This prevents a taxpayer from being subject to tax on benefits that he must repay because he has been overpaid previously.

Example: Taxpayer received $3000 in social security benefits in year 1 and $2,700 in year 2. In March of year 2 the Social Security Administration notified taxpayer that he should have received only $2,500 in benefits in year 1. So, in year 2, taxpayer repaid $500 to the Social Security Administration for the overpayment he got in year 1. The taxpayer figures his year 2 tax on $2,200 net benefits.

Any repayment of benefits made during a year (including a repayment for a benefit from an earlier year) will be shown on the Form SSA-1099 or RRB-1099 sent to the taxpayer. The gross benefits are shown in box 3 of the form, the repayment in box 4, and the net benefits -- the amount used to figure if any of the benefits are taxable -- in box 5.

If repayments are more than gross benefits, none of the benefits received are includible. (In that situation, the net benefits shown in box 5 of Form SSA-1099 or RRB-1099 will be negative.) However, where a joint return is filed, and one spouse's repayments are more than that spouse's gross benefits, but the other spouse's repayments are less than that other spouse's gross benefits, the first spouse's net repayment must be subtracted from the second spouse's net benefits to determine if any of the benefits are includible.

Example: H and W file a joint return. During the year, H received $3,000 in social security benefits and didn't repay any benefits. W repaid $500 more in social security benefits than she received. H and W use $2,500 ($3,000 minus $500) as their net social security benefits when figuring if any of their combined benefits are includible in income.

The rules are a little different if the benefits have been stopped, and the repayment is made out of personal funds.

A taxpayer may deduct under the loss rules the repayment of a social security benefit that he included in gross income in an earlier year. If any portion of the repayments would have been allowable as a deduction for the tax year as a business loss or a loss on a transaction entered into for profit, that portion is allowable as a deduction only to the extent it exceeds the social security benefits received by the taxpayer during the tax year (and not repaid during that tax year). In other words, if the repayments in a year exceed the benefits received in that year, and all or part of that excess represented benefits the taxpayer included in gross income in an earlier year, then the taxpayer can take an itemized deduction for the amount of the excess that represents those benefits.

The taxpayer who receives social security benefits that must later be repaid has an apparent right to the funds. Thus, the relief of Code Sec. 1341 is available where social security benefits previously included in gross income are repaid.

I know that this is probably getting tiresome, but we now have to go to Code Sec. 1341 to review the relief provisions. Code section 1341 is very complicated, so I