Social Security Disability Back Pay

[OkieTaxGal]

My sister in law just recieved her social security after two years. They sent her back pay for the two years. The company she had worked for has been paying her Disability for the two years. She received w-2's, never was checked 3rd party sick pay, still had the retirement box checked. Everything marked the same as before her injury, except they never withheld her Fed or State Tax. Now that she has recieved her SS Disability they say she owes them back the last two years..........She has already paid taxes on that money and won't the lump sum be on her statement from SS for 2009 tax returns? So she will have taxes to pay on that Lump Sum. If she owes it back to her employer how will she be reimbursed for the taxes she paid on it for the last two years? I did'nt know you had to pay back LTD. Sorry so long, I'm just confused I've never delt with Back Pay from SSI. Also what about the Attorney fees? Can that be deducted on Schedule A?

Thanks for any help!!

Paula

[jainen]

>>Back Pay from SSI<<

[First of all, assuming you mean SSD (Social Security Disability) rather than SSI (nontaxable Supplemental Security Income), determine how much of the lump sum was paid for each year, and the same for the repayment.]

Unfortunately, your sister may still have some double taxation even though there are a couple tricks to reduce it. Her Social Security can be treated as all received in 2009 or recalculated for each prior year. Either way, the tax is added to 2009. See the lump sum election in Pub 915 at http://www.irs.gov/pub/irs-pdf/p915.pdf. Attorney fees can only be deducted on Schedule A for the year paid, subject to 2% limit.

The repayment can be netted against any long-term disability received for 2009. Amounts for prior years can be taken either as a credit or a deduction in 2009. See the section on repayments in Pub 525 at http://www.irs.gov/pub/irs-pdf/p525.pdf.

[OkieTaxGal]

Yes it is SSD. Thank you for the help. I just didn't want to miss anything. I haven't delt with any pay back to an employer for disability pay. It just didn't seem right her having to pay back 17,000 that she has paid taxes on. She broke her back at work thru another employees fault and has had 5 operations. She will never be able to work for any length of time so I wanted to make sure she got all the benifits she was allowed.

Thanks again

Paula

[jainen]

>>It just didn't seem right her having to pay back 17,000 that she has paid taxes on.<<

All things considered, her tax situation doesn't seem to me to offer much to complain about. She paid normal tax on income actually received, like anybody else. It was replaced by Social Security which is at worst only partially taxable and she gets to choose which way to calculate that tax. She also gets to choose which way to calculate her credit or deduction for taxes previously paid. Meanwhile, all her lost wages, medical bills, and a lot of intangibles can be covered by Workers Comp, insurance, and a legal settlement without any taxation at all.

She got a tough hit, no dispute about that--but not because her taxes aren't fair.

[OkieTaxGal]

I Guess when you look at it that way it doesn't seem so bad after all. I didn't know for sure if she would be able to get a credit for taxes paid on the returned money. So that's why i posted I knew someone on here could help me.

This board hasn't failed me yet. Thanks for all the good info.