Social Security Disability Lump Sum Payment

[Chowdahead]

Two years ago, I had a client who had received 3 years worth of Social Security Disability payments in one lump-sum. I filled out the SSA Lump Sum worksheet and determined that he didn't owe a tax.

However, several months later the client received a letter from the IRS claiming that he owed a tax. He called and the IRS told him that his preparer "did not note on the return that it was a lump sum payment that was excluded from tax". It was all straightened out after a couple of weeks. I never really understood how I could have included this info in the return, other than the worksheet.

I have another client in a similar situation this year. My question is how do I make sure the information from the worksheet is transmitted to the IRS? It seems to me that worksheets are not transmitted in the e-file. So how am I supposed to indicate on an e-filed return that this is a lump-sum payment over several years?

Is there actually a specific form other than the worksheet for doing this? I could not find any within ATX.

[TAXBILLY]

When you use the lump sum worksheet you will see the letters LSE printed just to the left of line 20a, Form 1040.

It is easy to miss when being processed.

I highlight the letters and the line 20b in yellow to alert the key puncher.

taxbilly

[jainen]

>>It is easy to miss when being processed.<<

... one more example of why electronic filing is so much better.

[kcjenkins]

However, in this case Chowdahead is asking about an efiled return. All I can suggest is the you look at the returns page 1 and make sure you see that LSE is clearly showing. If not, you might have missed a check-box. Although I d0n't think you need to do anything except add that worksheet, for the info to flow. I think it was probably just a screwup at the IRS end, because I've used it a number of times on efiled returns, and it has always worked perfectly.

[Cathy]

In 2008, client received a letter after we had efiled with a Lump Sum Election designation of LSE and a Public Safety Officer designation of PSO. Both LSE and PSO appeared on the hard copies of the return. Both issues were addressed in the correspondence.

The agent at IRS I spoke with did indeed see the LSE designation on the e-filed return (she fussed that another had missed it), however, the PSO designation did not appear on IRS' return. She told me at that time that their systems do recognize the LSE designations, but NOT the PSO designation. She told me to mail in those type of returns in the future. I don't have but a couple as most public safety officers' retirement benefits are paid in full by the agencies they worked for. (FYI)

Cathy

[Chowdahead]

Believe it or not I am still working on this. The client is in no rush and I really want to get this right.

The lump sum is around $45,000. The three prior years have rolled over in the worksheet. I didn't have to enter anything except the three prior years above on the worksheet.

However, the entire $45,000 is showing up on Line 20a, with no mention of LSE.

Is this the way it is supposed to display? Does ATX even have the capability to display the LSE notation?

[jklcpa]

Yes, the full benefits received in 2009 will appear on 20a no matter what year they are for. The idea of the lump sum worksheet is to calculate the tax as if it had been received in the earlier year. The lump sum calcs are beneficial if the taxpayer is in a lower tax bracket during the earlier year to which the lump sum payment is for. If the taxpayer is in the same bracket for both tax years, usually the tax will be the same using both methods.

[TAXBILLY]

>>Is this the way it is supposed to display? Does ATX even have the capability to display the LSE notation?<<

The letters LSE will print to the left of line 20a. It's a dumb place to put it because it can easily be missed when filing a paper return but it's not ATX's fault. The IRS requires it to be in that spot. I highlight LSE in yellow as well as 20b to alert the key puncher.

taxbilly

[RitaB]

Yes, ATX displays "LSE" IF it is beneficial to assign the income to prior years. I mail these, with the worksheets, cause the very first one I did 100 years ago, IRS missed it. I highlight the "LSE" too, as Taxbilly said.

[GeneInAlabama]

>>cause the very first one I did 100 years ago, IRS missed it<<

WOW Rita! I didn't realize you were that old. Please be careful the rest of tax season and don't overdo. Stop and rest often.

[RitaB]

I'll do that, Sonny. Hey, where's my snuff?

[GeneInAlabama]

Rita, you made my day. It's been a looong time since I have been called sonny.

[RitaB]

Rita, you made my day. It's been a looong time since I have been called sonny.

I do what I can. Whipper Snapper.

[Chowdahead]

Thanks for the responses!

[B. Jani]

To continue this, i have the same problem as client received lumpsum for 08 in 09 due to disability. Fill the lump sum work sheet and i see the LSE in front of line 20A.

Now my question is that SSA-1099 also shows $5300 as ATTORNEY FEES and deducted from the total payout. Does this goes to SCH-A line 23 or NO BENEFIT?

Please help.

TIA.

[jklcpa]

Had one exactly like this last week. Whatever percentage of the soc sec was taxable (mine was the full 85%), that is the percentage of the attorney fees that are deductible. My deduction was $4,505 (5,300 * 85%). Yes, report as misc deduction on line 23 of Sch A, subject to the 2% limitation.

[jainen]

>>that is the percentage of the attorney fees that are deductible<<

Is that allocation based on any specific ruling? The amount of the fee is set by law (technically, the maximum fee), and is not related to the amount of the award. The so-called non-taxable part is identical to a calculation that it is fully taxable at a lower rate, like capital gains. In my opinion, not allowing the fees to be deducted in full does not reflect the true economic circumstances of the transaction, and is patently unfair and unrealistic.

[RitaB]

I heard it was RR 87-102 but I am not smart enough to verify that.