For every year in which you receive Social Security Disability benefits, Social Security Retirement benefits, Railroad Retirement Disability benefits, or Railroad Retirement Disability benefits, you will receive a form the following January giving you the necessary information to report your taxable benefits, if any. For Social Security Administration recipients, it will be titled Form SSA-1099, and for Railroad Retirement Board recipients it will be titled RRB-1099. Those individuals who are receiving Supplemental Security Income benefits (SSI) will probably not receive any form since SSI benefits are never taxable. In theory, a certain percentage of your Social Security or railroad retirement disability benefits may be taxable, but the amount, if any, is subject to a mathematical calculation. The percentage of your benefit which is taxable depends on your other income (or spouse's income). The amount you must include, and which is subject to tax, can be as high as 85%.
The total amount of your benefits will be shown in Box 5. It is this number that you must place in box 20a on your federal tax return, form 1040. In Box 3, and the Description of the Amount in Box 3 (located immediately underneath Box 3), you will find necessary information which will have a bearing on the "taxable" amount of your benefit, which you will place on Line 20 of the tax return. Of key import in the Description of Box 3 will be the amount you might have paid for Medicare Part B or Part C and Part D (all of which are deductible if you itemize your return, on Line 3 of Schedule A in the section entitled "Medical and Dental Expenses"). More important, if you received a retroactive award as a result of the Law Office of Charles E. Binder and Harry J. Binder winning your case, the Description Box will also list the amount of the award and the year for which is was awarded. The amount of each year's benefit that your tax preparer, or you, determine to be taxable (using the "Lump Sum Election" method of allocation) is determined on a year by year basis using the information given. The amount shown in Box 3 or Box 5 may not be the amount to be used in determining taxable benefits, especially if you have retroactive benefits included in those boxes. It will be far less, if even taxable. We have had clients with over $100,000 in retroactive benefits, but who had zero (-0-) taxable income due to the lump sum election. If you have retroactive benefits, please go on to Tax Tip #3 for instructions on how to determine how much to show.
There are two other very important items to be found in your SSA-1099 or RRB-1099. If the Law Office of Charles E. Binder and Harry J. Binder received any fees for its work in representing you, the amount will be shown in the Description part of Box 3. Fees which we received in representing you are fully deductible if you itemize. This deduction is to be shown on Line 23 of Schedule A. The other important information will be shown in Box 6. If you had any withholding taken from your benefits, it will be shown there. That withholding amount goes to Line 62 of your 1040 form (the section titled "Payments.").
As a general rule, if you are single, head of household, qualifying widow(er), or married filing separately and having lived the entire year apart from your spouse, take one half (½) of your benefits shown in Box 5, add all your taxable pensions, wages, interest, dividends, tax exempt income, and other taxable income, and if that amount exceeds $25,000, your benefits may be taxable. If you are married filing jointly, if that amount exceeds $32,000, your benefits may be taxable. If you are married filing separately, but you lived with your spouse for any time during 2013, the benefits are always taxable.
For further information regarding this, consult your tax preparer, or obtain Publication 915 from the Internal Revenue Service (www.IRS.gov).
If you are collecting benefits, and have minor or dependent children who are also collecting benefits as a result of your entitlement (or other "auxiliary" dependents - wives, ex-wives, parents, etc.), the benefits received for your children or those other individuals go on their tax returns, not yours. Benefits received by others do not affect in any manner your tax responsibility. As a general rule, the Social Security number shown in Box 2 of the SSA-1099, or RRB-1099 governs who shows the income.
Unless there is any other income that your child receives, there will be no tax on the children's Social Security benefits and they do not have to file a tax return.
If you were awarded retroactive benefits, your children will also have received retroactive benefits. Use the "lump sum election" discussed in Tax Tip #3 to determine if any of their retroactive award is taxable.
When we win your case, the chances are that the benefits you received for the current year (Box 3 and 5 of your SSA-1099) include what you should have received in earlier years. Because Social Security benefits are now taxable at certain predetermined income levels, your receipt of benefits for more than one year might make your "lump sum award" taxable. That's not fair. It's not right. And there are two ways we can make adjustments to level the playing field:
A. You first split the lump sum award by years. The amount for each year is noted in "Description of Box 3" of the SSA-1099 form you receive. Pull out your old returns, and for each year, determine how much Social Security benefits (or Railroad Retirement benefits), if any, would have been taxable based on the worksheet calculations. Then add all the "taxable amounts," if any, together and show this amount on Line 20 of your form 1040. Put the full amount of your Social Security benefits, including your retroactive award, in Box 20a. If you are filing a paper return, next to Line 20 of the 1040 add the letters "LSE" next to the amount.
If you are doing your own return, there are four different worksheets, issued by the IRS, to aid you in determining the correct taxable amount of your social security benefits when using the Lump Sum Election. To see samples of how this is done, download Publication 915 from the IRS (www.IRS.gov), and review pages 11 - 14.
B. Your other option is to re-figure your old returns from the relevant years and file an amended return for each year (IRS Form 1040-X). This is usually not a good idea. A tax preparer will charge you for each amended return, and you invite an audit for each year reopened. And, if you owe money for those years, you will end up paying interest on top of the taxes. However, there is the possibility that this might cost you less. If the money is significant, don't let Uncle Sam keep your money. Keep him honest. It's the American way!
When we win your case, we are generally awarded a fee for our representation. You are allowed a deduction for every expense you incur in preparing for your case. The amount of our fee, if it was withheld for us by the Social Security Administration (or the Railroad Retirement Board) will be shown in the Description for Box 3 on the SSA-1099 form you receive in January. If you paid us directly, and you have questions about how much the fee was, or if you want proof of payment, just give us a call and we will send you a letter stating the tax deductible amount. You are entitled to the deduction on your tax return whether it was withheld for us, or you paid us directly.
The deduction is shown on Line 23 of Schedule A on your federal tax return. This deduction is taken in the year in which you pay the expense, or the Social Security Administration withheld the fee.
The IRS has stated that you can deduct expenses paid for your representation since it resulted in the production or collection of taxable income.
You are allowed a deduction for every expense you incur in preparing for your case. Those expenses are a legitimate deduction even if you are unsuccessful.
To help win your case, you incurred fees you paid for reports from doctors, hospitals, vocational experts, etc. These are deductible expenses, and are to be shown on Line 23 of Schedule A. Many tax preparers show medical examinations, reports, and hospital records as deductions in the Medical and Dental Section of Schedule A. That's wrong and it could cost you money.
If you can't find your records, or feel the amounts shown are incorrect, give us a call. We keep careful files.
You are allowed a deduction for every expense you incur in preparing for your case.
If you needed a doctor or vocational expert to testify for you at your hearing, you paid for that service. Therefore, it is deductible. It belongs on Line 23 of Schedule A.
All of your parking, automobile expenses (actual or through the use of the mileage expense amount calculated by the IRS), other transportation expenses, etc. that you incurred traveling to our offices, and to the hearings, are deductible on Line 23, Schedule A. Any payments made for special assistance to attend a hearing are also deductible.
Any and all expenses incurred in the preparation of your case are fully deductible; in the year you paid them, even if there is no decision in that year or in the unlikely event that we didn't win your case.
Doctor and other medical bills incurred for examinations and treatments are deductible, but only as a medical expense. These expenses, net of any medical insurance payments, are reported on Schedule A in the section entitled "Medical and Dental Expenses" on Line 1. Remember though that if the medical examination is for the preparation of a report which we need, or for the doctor to give us a report, it is deductible on Line 23 of Schedule A, not line 1.
Medicare is considered medical insurance for tax purposes. Deduct the full amount shown in the Description section of Box 3 of the SSA-1099 on the third line (unnumbered). Include Part B or C, and Part D, they are all deductible.
Many employers have provided their employees with Short and/or Long Term Disability Insurance. If the employer paid the premiums for these benefits, and you became entitled to these benefits as a result of your disability, you would have reported this income on your tax return in the year paid. Most of these insurance policies provide what we call a "social security offset." What that means is that the actual benefit due you is the net result after deducting such things as social security payments, workers' compensation benefits, etc. Thus, if you have been receiving disability payments from an insurance policy, or employer policy, and then receive a retroactive award from Social Security, you have to return an equivalent amount of your Social Security award to the insurance carrier.
In these cases, the government allows you to deduct the return of these insurance benefits (to the extent they were reported as taxable income in the year received) as a Schedule A itemized deduction on line 28. If the amount repaid was more than $3,000, you can elect a tax credit in lieu of the itemized deduction. The tax credit is determined in a manner similar to the Lump Sum Election explained in Tax Tip #3. The tax credit is then shown on line 71 of the federal form 1040, but you must write "IRC 1341" in the column to the right of line 71. Or, you can amend all the prior returns to correctly reflect the proper amount of income, and tax. In that manner, you will also receive interest from the IRS together with refunds for those years.
In certain cases, the amount of your Social Security disability benefit, or Tier 1 benefits under the Railroad Retirement Act, are reduced due to monies you received from a workers' compensation award. You only receive the smaller amount in your check from the government, but the SSA-1099 or RRB-1099 will show otherwise. In Boxes 3 and 5 of your SSA-1099, and RRB-1099 it will show the full amount of your award before the reduction, and that is the number that the Social Security Administration will report to the Internal Revenue Service. They do not report the actual amount paid to you, but rather the amount they would have paid if not for the workers compensation award (which is never taxable). In other words, you are paying taxes on money you did not receive! It's not right, it's unfair, but until the Congress fixes this, it puts the taxpayer in a bind.
As a cash basis taxpayer, you should not be subject to any tax as a result of this ridiculous position by the government. I suggest to all clients to show the amount reported by the federal agency in box 3 and 5 on the federal return form 1040 in box 20a. I would then calculate the actual Social Security income to be reported based on the net cash received, that is the gross payment less the offset. It is that amount that should be reported on line 20 on the federal form 1040. I would then attach an explanation to the return on the federal form "Miscellaneous Statement."
Please remember that most states and municipalities do not tax your Social Security or railroad retirement benefits, whether or not they were granted as a result of a disability. Whether or not they tax you, I believe that you can still take all of the deductions that I have talked about in the beginning. Something of a personal note. . . don't get mad at your accountant if he or she isn't up on the taxation and deductions associated with Social Security benefits. Tax preparation is a tough job. The rules are always changing.
At the Law Office of Charles E. Binder and Harry J. Binder, we've been doing this for a long time. And that is what it takes to really know this specialized field.
Here at the Law Office of Charles E. Binder and Harry J. Binder, we work hard to be sure you get your full benefits. But too often, the government gives with one hand and takes back more than it should with the other. That usually happens when our clients do their own returns, or when their tax preparers are not fully familiar with the specific demands of Social Security Disability law.
A tax return is like a blood test. When you get the results of a blood test, your bad cholesterol should be low, and your good cholesterol should be high. Ideally, within the constraints of honesty, when you finalize your tax return, your income should be low and your deductions should be high.
That's pretty obvious. What's not obvious is how can we (honestly) make it work out that way when it impacts our Social Security benefits.