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Social Security Lump-Sum Election

A lump sum Social Security payment is one that was paid in the current year as back pay for previous years. Depending on the taxpayer’s current year AGI, this income may be taxable and should be reported on Form 1040.

Boxes 3 to 5 of the taxpayer’s 1099-SSA are relevant:

  • Box 3 shows the amount received in the current year;
  • Box 4 shows the amount repaid by the taxpayer during the current year, if any;
  • Box 5 shows the difference between Boxes 3 and 4 and must be reported as income on the current year return.

If Box 3 of the 1099-SSA includes any lump-sum payment for an earlier year, the taxpayer can use the lump sum election to refigure their taxable lump-sum payment for the previous year. If the amount reduces the taxable benefit for the current year, the amount can be deducted from their taxable income.

The SSA Lump-Sum Payment Worksheet will help you determine if the lump-sum election is beneficial for the taxpayer, but there is no need to complete the worksheet if the taxpayer has no taxable Social Security benefits.

To access the worksheet in Keystone Tax Solutions Pro Online, select:

  • Federal Section
  • Income
  • IRA/Pension Distributions
  • Social Security Benefits
  • Under Lump-Sum Payments select Begin Worksheet
  • Enter each of bit of information requested:
    • The prior year the lump-sum payment was made for
    • The filing status in the prior year
    • The total SSA payments received in the prior year
    • The portion of this year’s SSA that applies to the prior year
    • The Modified AGI for the prior year. This is equal to the prior year AGI plus these prior year adjustments:
      • Adoption benefits (Form 8839)
      • Qualified U.S. savings bond interest (Form 8815)
      • Student loan interest (Form 1040, page 1; or Form 1040A, page 1)
      • Tuition and fees (Form 1040, page 1; or Form 1040A, page 1)
      • Domestic production activities (for 2005 through 2017, Form 1040, page 1)
      • Foreign earned income or housing (Form 2555 or Form 2555-EZ)
      • Certain income of bona fide residents of American Samoa (Form 4563) or Puerto Rico.
    • The taxable benefits reported in the prior year

Select Continue after all the prior year information has been entered. If you need to add a second lump-sum payment, you can do so. Otherwise, select Continue.

The program will calculate the current year amount of taxable benefits and adjust the amount automatically if it is beneficial to the taxpayer. The abbreviation LSE will print next to the recalculated taxable amount of SS benefits on Form 1040.

Note: This is a guide to entering a lump sum Social Security payment into the Keystone Tax Solutions Pro program. This is not intended as tax advice.

Additional Information:

Publication 915, Social Security and Equivalent Railroad Retirement Benefits

Updated on September 8, 2020

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