Repayments More
Than Gross Benefits
In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total
benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this
occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses)
and none of your benefits will be taxable. If you receive more than one form, a negative
figure in box 5 of one form is used to offset a positive figure in box 5 of another form
for that same year.
If you have any questions about this negative figure, contact your local Social
Security Administration office or your local U.S. Railroad Retirement Board field office.
Joint return. If you and your spouse file a joint return, and your
Form SSA-1099 or RRB-1099 has a negative figure in box 5 but your spouse's does not,
subtract the amount in box 5 of your form from the amount in box 5 of your spouse's form.
You do this to get your net benefits when figuring if your combined benefits are taxable.
Repayment of benefits received in an earlier year. If the total
amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you
can take an itemized deduction for the part of this negative figure that represents
benefits you included in gross income in an earlier year.
If this deduction is $3,000 or less, it is subject to the
2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized
deductions. Claim it on line 22, Schedule A (Form 1040).
If this deduction is more than $3,000, you have some special
instructions to follow. Get Publication 915 for those instructions.
Sickness and Injury Benefits
Most payments you receive as compensation for illness or injury are
not taxable. These include the following.
Workers' compensation. Amounts
you receive as workers' compensation for an occupational sickness or injury are fully
exempt from tax if they are paid under a workers' compensation act or a statute in
the nature of a workers' compensation act. The exemption also applies to your survivor(s).
If part of your workers' compensation reduces your social security or equivalent
railroad retirement benefits received, that part is considered social security (or
equivalent railroad retirement) benefits and may be taxable. For a discussion of the
taxability of these benefits, see Social Security and Equivalent Railroad Retirement
Benefits, earlier.
Return to work. If you return to work after qualifying for
workers' compensation, payments you continue to receive while assigned to light duties are
taxable as wages.
Federal Employees' Compensation Act (FECA). Payments received under this Act for personal injury or sickness, including
payments to beneficiaries in case of death, are not taxable. However, you are taxed
on amounts you receive under this Act as continuation of pay for up to 45
days while a claim is being decided. Also, pay for sick leave while a claim is being
processed is taxable and must be included in your income as wages.
 If part of the
payments you receive under FECA reduces your social security or equivalent railroad
retirement benefits received, that part is considered social security (or equivalent
railroad retirement) benefits and may be taxable. For a discussion of the taxability of
these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier.
Benefits under an accident or health insurance policy.
Benefits you receive under an accident or health insurance policy are not
taxable if:
- You paid the premiums, or
- Your employer paid the premiums and you included the premiums in your gross income.
Long-term care insurance contracts. Long-term care insurance contracts generally are treated as accident and health
insurance contracts. Amounts you receive from them (other than policyholder
dividends or premium refunds) generally are excludable from income as amounts received for
personal injury or sickness. However, the amount you can exclude may be limited. Long-term
care insurance contracts are discussed in more detail in Publication 525.
Compensation for permanent loss or disfigurement.
Compensation you receive for permanent loss or loss of use of a part or
function of your body, or for your permanent disfigurement is not taxable. This
compensation must be based only on the injury and not on the period of your absence from
work. These benefits are not taxable even if your employer pays for the accident and
health plan that provides these benefits.
Disability benefits. Benefits
you receive for loss of income or earning capacity as a result of injuries under a no-fault
car insurance policy are not taxable.
Disability Income
Generally, if you retire on disability, you must report your pension
or annuity as income.
If you were 65 or older by the end of 2002, or you were retired on permanent and total
disability and received taxable disability income, you may be able to claim the credit for
the elderly or the disabled. See Credit for the Elderly or the Disabled, later.
Taxable disability pensions or annuities. Generally, you must report
as income any amount you receive for your disability through an accident or health
insurance plan that is paid for by your employer. However, certain payments may not be
taxable to you. See Sickness and Injury Benefits, earlier.
Cost paid by you. If you pay the entire cost of a health or
accident insurance plan, do not include any amounts you receive for your disability as
income on your tax return. If your plan reimbursed you for medical expenses you deducted
in an earlier year, you may have to include some, or all, of the reimbursement in your
income.
Accrued leave payment. If you retire on disability, any
lump-sum payment you receive for accrued annual leave is a salary payment. The payment is
not a disability payment. Include it in your income in the year you receive it.
Workers' compensation. If part of your disability pension
is workers' compensation, that part is exempt from tax. The exemption also applies to your
survivors.
How to report. You must report all your taxable disability income as
wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age.
Generally, this is the age at which you can first receive a pension or annuity if you are
not disabled.
Beginning on the day after you reach minimum retirement age, the payments you receive
are taxable as a pension. Report them on lines 16a and 16b of Form 1040 or on lines 12a
and 12b of Form 1040A.
Life Insurance Proceeds
Life insurance proceeds paid to you because of the death of the
insured person are not taxable unless the policy was turned over to you for a
price. This is true even if the proceeds were paid under an accident or health insurance
policy or an endowment contract.
Proceeds not received in installments. If death benefits are paid to
you in a lump sum or other than at regular intervals, include in your income only the
benefits that are more than the amount payable to you at the time of the insured person's
death. If the benefit payable at death is not specified, you include in your income the
benefit payments that are more than the present value of the payments at the time of
death.
Proceeds received in installments. If you receive life insurance
proceeds in installments, you can exclude part of each installment from your income.
To determine the excluded part, divide the amount held by the insurance company
(generally the total lump sum payable at the death of the insured person) by the number of
installments to be paid. Include anything over this excluded part in your income as
interest.
Installments for life. If, as the beneficiary under an
insurance contract, you are entitled to receive the proceeds in installments for the rest
of your life without a refund or period-certain guarantee, you figure the excluded part of
each installment by dividing the amount held by the insurance company by your life
expectancy. If there is a refund or period-certain guarantee, the amount held by the
insurance company for this purpose is reduced by the actuarial value of the guarantee.
Surviving spouse. If
your spouse died before October 23, 1986, and insurance proceeds paid to you because of
the death of your spouse are received in installments, you can exclude up to $1,000
a year of the interest included in the installments. If you remarry, you can continue to
take the exclusion.
Surrender of policy for cash. If
you surrender a life insurance policy for cash, you must include in income any proceeds
that are more than the cost of the life insurance policy. You should receive a Form
1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a
and 16b of Form 1040, or lines 12a and 12b of Form 1040A.
Endowment Proceeds
Endowment proceeds paid in a lump sum to you at maturity are taxable
only if the proceeds are more than the cost of the policy. To determine your cost,
add the aggregate amount of premiums (or other consideration) paid for the contract and
subtract any amount that you previously received under the contract and excluded from your
income. Include the part of the lump-sum payment that is more than your cost in your
income.
Endowment proceeds that you choose to receive in installments instead of a lump-sum
payment at the maturity of the policy are taxed as an annuity. This is explained in
Publication 575. For this treatment to apply, you must choose to receive the proceeds in
installments before receiving any part of the lump sum. This election must be made within
60 days after the lump-sum payment first becomes payable to you.
Accelerated Death Benefits
Certain payments made as accelerated death benefits under a life
insurance contract or viatical settlement before the insured's death are excluded
from income if the insured is terminally or chronically ill. See Exception later.
For a chronically ill individual, the payments must be for costs incurred for qualified
long-term care services or made on a periodic basis without regard to the costs.
In addition, if any portion of a death benefit under a life insurance contract on the
life of a terminally or chronically ill individual is sold or assigned to a viatical
settlement provider, the amount received also is excluded from income. Generally, a
viatical settlement provider is one who regularly engages in the business of buying or
taking assignment of life insurance contracts on the lives of insured individuals who are
terminally or chronically ill.
To claim an exclusion for accelerated death
benefits made on a per diem or other periodic basis, you must file Form 8853, Archer
MSAs and Long-Term Care Insurance Contracts, with your return.
Terminally or chronically ill defined. A terminally ill person is one who has been certified by a physician as having
an illness or physical condition that reasonably can be expected to result in death
within 24 months from the date of the certification. A chronically ill person is one who
is not terminally ill but has been certified (within the previous 12 months) by a licensed
health care practitioner as meeting either of the following conditions.
- The person is unable to perform (without substantial help) at least two activities of
daily living for a period of 90 days or more because of a loss of functional capacity.
- The person requires substantial supervision to protect himself or herself from threats
to health and safety due to severe cognitive impairment.
Exception. The exclusion does not apply to any amount paid to a
person other than the insured if that other person has an insurable interest in the life
of the insured:
- Because the insured is a director, officer, or employee of the other person, or
- Because the insured has a financial interest in the business of the other person.
Sale of Home
You may be able to exclude from income any gain up to $250,000
($500,000 on a joint return in most cases) on the sale of your main home. If you
can exclude all of the gain, you do not need to report the sale on your tax return.
Maximum Amount of Exclusion
You can exclude up to $250,000 of the gain on the sale of your main
home if all of the following are true.
- You meet the ownership test.
- You meet the use test.
- During the 2-year period ending on the date of the sale, you did not exclude gain from
the sale of another home.
You can exclude up to $500,000 of the gain on the sale of your main home if all of the
following are true.
- You are married and file a joint return for the year.
- Either you or your spouse meets the ownership test.
- Both you and your spouse meet the use test.
- During the 2-year period ending on the date of the sale, neither you nor your spouse
excluded gain from the sale of another home.
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that
during the 5-year period ending on the date of the sale, you must have:
- Owned the home for at least 2 years (the ownership
test), and
- Lived in the home as your main home for at least 2 years (the
use test).
Exception. If you owned and lived in the property as your main home
for less than 2 years, you still can claim an exclusion in some cases. Generally, you must
have sold the home due to a change in place of employment or health. The maximum amount
you can exclude will be reduced. See Publication 523, Selling Your Home, for more
information.
Married Persons
If you and your spouse file a joint return for the year of sale, you can exclude gain
if either spouse meets the ownership and use tests. (See Maximum Amount of Exclusion, earlier.)
Death of spouse before sale. If your spouse died before the date of
sale, you are considered to have owned and lived in the property as your main home during
any period of time when your spouse owned and lived in it as a main home.
Home transferred from spouse. If your home was transferred to you by
your spouse (or former spouse if the transfer was incident to divorce), you are considered
to have owned it during any period of time when your spouse owned it.
Use of home after divorce. You are considered to have used property
as your main home during any period when:
- You owned it, and
- Your spouse or former spouse is allowed to live in it under a divorce or separation
instrument.
Business Use or Rental of Home
You may be able to exclude your gain from the sale of a home that you have used for
business or to produce rental income. But, you must meet the ownership and use tests. See
Publication 523 for more information.
Depreciation after May 6, 1997. If you were entitled to take
depreciation deductions because you used your home for business purposes or as rental
property, you cannot exclude the part of your gain equal to any depreciation allowed or
allowable as a deduction for periods after May 6, 1997. See Publication 523 for more
information.
Reporting the Gain
Do not report the 2002 sale of your main home on your tax return
unless:
- You have a gain and you do not qualify to exclude all of it, or
- You have a gain and you choose not to exclude it.
If you have any taxable gain on the sale of your main home that cannot be excluded,
report the entire gain on Schedule D (Form 1040). If you used your home for business or to
produce rental income, you may have to use Form 4797, Sale of Business Property,
to report the sale of the business or rental part. See Publication 523 for more
information.
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