Lump-Sum Election

You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2001 in your 2001 income, even if the payment includes benefits for an earlier year.

This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.

Generally, you use your 2001 income to figure the taxable part of the total benefits received in 2001. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.

Under the lump-sum election method, you refigure the taxable part of all your benefits for the earlier year (including the lump-sum payment) using that year's income. Then, you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for 2001 (figured without the lump-sum payment for the earlier year).

Since the earlier year's taxable benefits are included in your 2001 income, no adjustment is made to the earlier year's return. Do not file an amended return for the earlier year.

Will the lump-sum election method lower your taxable benefits? To find out, take the following steps.

1. Complete Worksheet 1 in this publication.
2. Complete Worksheet 2 and Worksheet 3 as appropriate. Use Worksheet 2 if your lump-sum payment was for a year after 1993. Use Worksheet 3 if it was for 1993 or an earlier year. Complete a separate Worksheet 2 or Worksheet 3 for each earlier year for which you received the lump-sum payment.
3. Complete Worksheet 4.
4. Compare the taxable benefits on line 18 of Worksheet 1 with the taxable benefits on line 20 of Worksheet 4.

If the taxable benefits on Worksheet 4 are lower than the taxable benefits on Worksheet 1, you can elect to report the lower amount on your return.

Making the election. If you elect to report your taxable benefits under the lump-sum election method, follow the instructions at the bottom of Worksheet 4. Do not attach the completed worksheets to your return. Keep them with your records.

Once you elect this method of figuring the taxable part of a lump-sum payment, you can revoke your election only with the consent of the IRS.

Lump-sum payment reported on Form SSA-1099 or RRB-1099. If you received a lump-sum payment in 2001 that includes benefits for one or more earlier years after 1983, it will be included in box 3 of either Form SSA-1099 or Form RRB-1099. That part of any lump-sum payment for years before 1984 is not taxed and will not be shown on the form. The form will also show the year (or years) the payment is for. However, Form RRB-1099 will not show a breakdown by year (or years) of any lump-sum payment for years before 1999. You must contact the RRB for a breakdown by year for any amount shown in box 9.

Example

Jane Jackson is single. In 2000 she applied for social security disability benefits but was told she was ineligible. She appealed the decision and won. In 2001, she received a lump-sum payment of $6,000, of which $2,000 was for 2000 and $4,000 was for 2001. Jane also received $5,000 in social security benefits in 2001, so her total benefits in 2001 were $11,000. Jane's other income for 2000 and 2001 is as follows.

To see if the lump-sum election method results in lower taxable benefits, she completes Worksheets 1, 2, and 4 from this publication. She does not need to complete Worksheet 3 since her lump-sum payment was for years after 1993.

Jane completes Worksheet 1 to find the amount of her taxable benefits for 2001 under the regular method. She completes Worksheet 2 to find the taxable part of the lump-sum payment for 2000 under the lump-sum election method. She completes Worksheet 4 to decide if the lump-sum election method will lower her taxable benefits.

After completing the worksheets, Jane compares the amounts from line 20 of Worksheet 4 and line 18 of Worksheet 1. Because the amount on Worksheet 4 is smaller, she chooses to use the lump-sum election method. To do this, she prints "LSE" to the left of line 20a on Form 1040. She then enters $11,000 on line 20a of Form 1040 and her taxable benefits of $2,500 on line 20b.

Jane's filled-in worksheets (1, 2, and 4) follow.

Jane's Worksheet 1

Jane's Worksheet 2

Jane's Worksheet 4