How do we handle taxes a lump sum payments from a SSA-1099 backdated to 2011?

Question

In 2011, I went on short term disability provided by my employer. In December 2012, I transitioned to Long Term Disability. I remained on Long Term Disability until November of 2012. The wages I received from this LTD plan were received as non-taxable pensions, which I did not have to pay taxes on. While on LTD, I was forced to apply for Social Security Disability. Originally, SSD denied the application, but an appeal was made. The appeal was granted in September of 2013. During this process we had to forfeit $4,500 of our award to the attorneys appointed by the LTD carrier. The lump sum that was granted from SSD was backdated to December of 2011. The total award was for around $38,000.

When I received the award for SSD, I had to reimburse the LTD carrier (essentially the whole award minus the $4,500 attorney fee).

When using TurboTax to complete our taxes and entering in SSA-1099, it shows that around $12,000 is owed in taxes.

In February of 2014, I was told by SSD we had to apply for dependent benefits which were awarded shortly after back-dated to 2011 as well.

I am confused on how this tax situation works.

• Should the attorney who completed the SSD application chosen the option to have taxes withheld and is this an option on the application?
• Why did Social Security not give us the option to withhold taxes if taxes were due?
• Why are taxes due if we had to repay all the received money?
• Why are taxes due on the full award including the money from the years 2011 and 2012 in 2013 if the SSD process is long and drawn out?
• Are we going to owe taxes in 2015 for 2014 SSD awards for the dependents dating back to 2011?
• How do we get SSD to withhold income tax if it is taxable?

I feel that if SSD didn't take so long to decide and payout the award, then the lump sum received in 2013 wouldn't have been so high requiring it to be

Any help would be appreciated.

Answer 1

There's nothing much you can do here, and I don't think you'll succeed in placing blame on the lawyers.

In order for SSA to have the tax withheld from your benefits, you need to submit form W-4V. Here are the details on how to get it and what to do with it. This form is voluntarily submitted, i.e.: no-one will ask for it, you have to actively send it out on your own.

As to repayment of the LTD benefits - since they were not taxable, there's no change in the taxable income on your behalf. What you got wasn't taxed, so what you gave back - doesn't provide any tax benefit.

As to why SSA benefits are taxable and LTD benefits are not - this is because SSA is pre-tax, and LTD premiums were (in your case, apparently) post-tax. However, the LTD benefits management company doesn't care or may be even know about this, and they do everything they can to reduce their own liability to you. If you're entitled to SSA benefits, it reduces their liability, that's why they insisted on your claim with SSA.

As to the SSA dragging their feet - they want to reduce their (taxpayers', essentially) liability as well. However, once they decided in your favor, you received what was rightfully yours, including back-pay. SSA benefits are taxable, in the year received. So you got a lump sum - taxable as a lump sum.

Sorry, but that's the way it is. This is an example where post-tax LTD premiums don't actually pay off...