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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 128145

<<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 can really only give you a very, very basic outline. Hang on. Here we go.

For the relief described in Code Sec. 1341 to apply, the amount of the deduction must exceed $3,000. Thus, the later repayment deduction must exceed $3,000 in each year in which relief is desired.

Thus, if the repayment made in any year by a cash basis taxpayer is $3,000 or less, he loses the benefit of this provision for that year.

Example: A taxpayer must repay $4,000 of previously reported income and actually does so in $2,000 installments in each of two different years. The taxpayer is not entitled to the relief in either year. However, he may be entitled to deduct $2,000 in each repayment year under the general rule (NOT the special rule for $3k or more, which is what we are talking about here) concerning repaid income items originally received under a claim of right.

If a taxpayer qualifies for the relief discussed (Code Sec. 1341), his tax for the year in which the deduction is allowable is the LESSER of the following:

(1) the tax for the tax year computed with the deduction, or
(2) an amount equal to
. . . the tax for the tax year computed without the deduction, minus
. . . the decrease in tax for the earlier tax year (or years) which would result from the exclusion of the item (or portion of the item) from gross income for the earlier tax year.

If the relief computation is made, the deduction is omitted in the repayment year.

If the taxpayer qualifies for relief and discovers that the alternative computation will yield the lesser tax, the first step is to compute the current (or repayment) year's tax without taking into account the repayment deduction to which he would otherwise be entitled. The second step is to recompute the tax for the earlier year in which the income later repaid was reported, by reducing or eliminating that income as the case may be. The reduction in the earlier year's tax which is thus arrived at should then be subtracted from the tax computed for the current year under (1) (i.e., the tax computed with the deduction) in the computation described above. The purpose of these computations is to determine the tax for the repayment year and not for the income year. The fact that the income year may be barred by the statute of limitations from either assessment or the filing of claims will not deprive the taxpayer of his right to this form of relief, although, as will be explained below, that fact may affect the total amount of tax he will have to pay.

Note: No election is required. The law states that the tax is the lesser of the two computations. Therefore, if the taxpayer fails to claim the relief provision, he is still entitled to correct the computation and file a claim for refund within the proper period of limitations.

The reduction in tax for the earlier income year is net of any increase in minimum tax for that year caused by the exclusion of the deductible repayment.

By this time, you probably think you are reading greek. I'm sorry, but it is really the best explanation that I can give you on a fairly complicated issue.

For additional information relating to Social Security repayments and tax issues, read IRS Publication 915. You can order Pub 915 by calling IRS at 1-800-TAX FORM. Or, you can download the publication by visiting the IRS Web Site:

Again, sorry to hear about your folks social security problems. But there IS relief. It can get pretty tricky. If you have any follow up questions (after you have read Pub 915), post 'em here and I'll be glad to try to hash 'em out with you.

TMF Taxes
Roy Lewis
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