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.
When looking at a taxpayer’s 1099-SSA, box 3 shows the amount received in the current year. Box 4 shows any amount that the taxpayer repaid during the current year. Box 5 shows the net amount received in the current year (box 3 minus box 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.
To determine if the lump-sum election would benefit the taxpayer, access the SSA Lump-Sum Payment Worksheet. From the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Enter ALL sources of income for the taxpayer and spouse (if applicable)
- Select Social Security Benefits (1099-SSA, RRB-1099)
- Enter the net benefits from box 5 of Form 1099-SSA for the taxpayer and for the spouse (if applicable)
- View the Social Security Benefits Worksheet. If the taxpayer does not have any taxable social security benefits, the lump-sum election will not change the return. If the taxpayer does have taxable social security benefits, select SSA Lump-Sum Payment Worksheet.
- Select New and then select the year for which benefits were received during the current year. This information should be included in the Description of Amount in Box 3 on the taxpayer’s SSA-1099.
- Enter the taxpayer’s filing status from the earlier year tax return
- Enter the total amount from box 5 of Form SSA-1099 for the earlier year
- Enter the portion of SSA benefits received in the current year for the earlier year
- Enter the Adjusted Gross Income for the earlier year
- Enter any of the following adjustments or exclusions that were claimed in the earlier year: Adoption Benefits (Form 8839), Qualified U.S. Savings Bond Interest (Form 8815), student loan interest, tuition and fees, domestic production activities, foreign earned income or housing, income of bona fide residents of American Samoa or Puerto Rico.
- Enter any tax-exempt interest received in the earlier year
- Enter the taxable benefits for the earlier year that were previously reported
Exit the menu when all of the earlier year information has been entered. The program will calculate the current year amount of taxable benefits and adjust the amount automatically if it benefits the taxpayer. The abbreviation LSE will print next to the re-calculated taxable amount of SS benefits on Form 1040.
NOTE: This is a guide on entering lump sum Social Security payment into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
Additional Information:
IRS Publication 915 – Social Security and Equivalent Railroad Retirement Benefits