Minimizing Income Tax On Social Security Disability Back Pay

Law Blog

Resolution of a Social Security disability claim can take years. The first payment includes back pay from the time of the original filing. Rather than pay income tax on the entire back pay amount in the year received, an alternative worksheet can be used to treat the back pay as if received over the years it actually covers.

Social Security disability income received throughout the year is taxed in the same manner as regular Social Security retirement income. Recipients are subject to taxation to the extent that half of their Social Security payments, plus their other income exceeds specified thresholds. The potential tax problem with back pay for Social Security disability is that it is initially reported as being paid in a single year.

Recognizing the overstatement

The Social Security Administration issues a Form SSA-1099 each year to report payments to recipients. The Form SSA-1099 for your first year will include back pay, in addition to scheduled payments for the year. If there are several years of back pay, the total could exceed the tax threshold for your filing status.

Using the alternative worksheets

The alternative tax treatment for Social Security disability back pay uses worksheets to allocate the back pay to the earlier years for which it was intended. Spreading the lump sum out over several years may result in a reduction or elimination of tax. The worksheets do not have an official IRS title, but are included in IRS Publication 915 and incorporated into tax software.

A separate worksheet is completed for each year for which back pay is received. An amount from each of the worksheets is included on another summary worksheet to determine the amount of Social Security income, and to report on your current tax return. The worksheet method calculates a change in taxable Social Security for the current year only. Prior year returns do not need to be amended.

Entering the worksheet result

If the back pay worksheet produces a lower taxable amount than the regular threshold method, the worksheet result is entered on your Form 1040. The instructions in Publication 915 advise to enter the letters LSE directly to the left of the entry box for taxable Social Security. The designation for lump sum election indicates that the entry amount was derived from the worksheet. Computer software will automatically include the designation.

The inclusion of back pay in your first disbursement provides a strong incentive not to delay your claim. Contact a Social Security disability attorney like one from Perry- Dieterich Co. LPA for assistance and guidance in processing your disability case.


18 November 2014