Question: I was finally approved for disability late last year and received a large lump sum payment from Social Security. But half of this money was for the tax year before last year. It makes it look like I had a high income last year. Am I going to have to give half my disability backpay away because of this? Can I amend the last year’s tax return and claim half the disability income on that return instead?
Answer: Disability backpay can bump up your taxable income in the year you receive the lump sum payment from Social Security, which could cause you to pay more in taxes than you should have to. Technically, part of the backpay should have been paid to you last year or even the year before, so Social Security does allow you to attribute part of the backpayment to prior years, if you know how to do it.
First, know that many people won’t owe taxes on their backpay at all because their income is so low. If you file your taxes individually and you received less than $25,000 in disability backpay and income during the year, you won’t owe any taxes on your Social Security disability income. Likewise, if you file your taxes jointly (with your spouse) and you received less than $32,000 in backpay and income during the year, you won’t owe any taxes on your disability income.
If your backpay and income are over these amounts, the IRS will allow you to allocate your past-due disability benefits to the year you should have received them, and you don’t have to “amend” your prior year tax returns to do it. Social Security should have sent you a form called SSA-1099. It will state in Box 3 how much of your disability backpay was owed to you for each of the previous years you accrued back pay.
You’ll still pay any taxes owed on these amounts with your current year’s tax return, but you’ll be able to figure out whether you owe taxes on each year’s disability backpayments using the amount of backpay attributable to the prior years and your other income in those years. In prior years where your income, including the backpay attributable to that year, was below $25,000 (or $32,000 if you’re married), you won’t owe any taxes on the disability backpay. IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits describes this method in full and provides worksheets, but it can still be difficult to figure out how to do it. You may want to talk to a tax professional or use tax preparation software to make the calculations for you.
Note also that if you hired a disability attorney to help you win your Social Security benefits, you can deduct the cost of the attorney’s fee so you don’t have to pay taxes on this amount. For more information on this, see our article on the taxation of disability backpay.