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.
On the taxpayer’s SSA-1099, Box 3 shows the amount received in the current year and Box 4 shows any amount that the taxpayer repaid during the current year. Box 3 minus Box 4 equals Box 5, the net amount received, reported as income in the current year return.
If Box 3 of the SSA-1099 includes any lump-sum payment for an earlier year, the section headed "Description of Amount in Box 3" will indicate the year(s) and amount(s), and the taxpayer can elect to refigure the taxable part of their benefits, potentially reducing the taxable amount for the current year.
If the taxpayer does not have any taxable social security benefits in the current year, the lump-sum election won't change the return and doesn't need to be completed. Otherwise, you can complete the SSA Lump-Sum Payment Worksheet to determine if the lump-sum election would benefit the taxpayer.
Completing the worksheet will require entering certain amounts gleaned from the prior year tax return(s), so be sure to have the prior year return(s) handy to refer to.
Important: Before completing the Lump-Sum Payment Worksheet, be sure you have entered into the tax return all the income for the taxpayer (and spouse, if applicable).
To access the Lump-Sum Payment Worksheet, from the Main Menu of the tax return (Form 1040) select:
- Social Security Benefits (1099-SSA, RRB-1099).
- Click the View button in the toolbar at the top to 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 and doesn't need to be completed. 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 is on the SSA-1099 in the section headed "Description of Amount in Box 3".)
- Enter the taxpayer's filing status from the earlier year tax return.
- Enter the 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 the total of the following adjustments or exclusions claimed in the earlier year, if any:
- Adoption Benefits (Form 8839).
- Qualified U.S. Savings Bond Interest (Form 8815).
- Student loan interest deduction.
- Tuition and fees deduction.
- Domestic production activities deduction.
- Foreign earned income or foreign housing exclusion (Form 2555).
- Income of bona fide residents of American Samoa (Form 4563) or Puerto Rico.
- Enter any tax-exempt interest received in the earlier year.
- Enter the taxable SS benefits previously reported for the earlier year.
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. TaxSlayer Pro will insert a current year's entry in the SSA Lump-Sum Payment menu. 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 payments into the TaxSlayer Pro program. This is not intended as tax advice.
IRS Publication 915 - Social Security and Equivalent Railroad Retirement Benefits