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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Disability Repayment to Private Carrier

This answer was rated:

How do you do the calculations for the IRS for disibility payments you
recieved from a private insurance that were repaid out of an SSA lump
sum payment. The disability payments are spread across 2003,2004
&2005
Customer: replied 11 years ago.
I Think the question is pretty straight forward and I am sure it
has happened to many people. Maybe the answer is too long for
someone to bother answering. A CPA or Tax Preparer should be
able to answer
Were the private DI payments taxable in the year of receipt?  Why are they being repaid?  Was there ever any question that SSA was going to make a payment triggering the repayment to the private DI carrier?  Did the private DI payments occur to replace lost salary as a result of disability?  Id th erepayment in 2005 in excess of $3,000?
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: 1. Payments were taxable as income in each of the years. ( of
course 2005 taxes haven't been paid. The money is being repaid
because SSA gave me a lump sum check from which the
disability carrier was repaid for each year the amount SSA would
have paid. The IRS calls this "Right of Claim" .
2. Yes there was a question SSA would pay-they had to approve
my claim which took 19 months to get through the system.
3. Yes the Payments from the private carrier were to replace
income lost due to a disabil;ity.
4. Yes the repayment to the insurance carrier amounted to
31280.69.
5. I have already paid the taxes on this money in the respective
tax years.

I understand the claim of right doctrine.  I have a few more questions.


Were the private DI premiums paid by your employer or with pre-tax withholdings, or were they paid with after-tax dollars (whether through employee withholding or direct payment) by you? 


Did you treat the DI payments as 100% taxable or did you apportion between taxable and non-taxable and if so, how much for each? 


Is your repayment voluntary or mandatory under the terms of the policy? 


If the SSA ruled against your claim, would you still have had to repay the DI monies? 

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: 1. The disability insurance is 100% paid by the employer as a
part of the yearly benefit package.

2. The benifits were treated as 100% taxable income in the years
years they were recieved.

3.The disability carrier hired a third party company to work on
getting the social security benifits. When SSA awarded the claim,
they computed the difference between what the insurance
company had paid and what SSA allowed on a monthly basis and
billed me for the amount SSA paid which was almost the entire
lump sum payment from SSA. They got apiece of the pie, I
suppose from the insurance company for doing this service. I
had no option in the issue.

4. My contention is this. Since they got the money they shoud
pay the tax. But the IRS doesn't seem to have a nice little
mechanism for doing this. I have a copy of Publication 915
which is not clear at all on this exact issue.
5. If SSA had ruled against me I would not have repaid these
monies.

Based on what you have represented it is my opinion that you are entitled to the statutory mitigation afforded under Internal Revenue Code Sec. 1341(a)(4) & (5).  This is so because you had an apparent claim of right to income from the DI carrier and there was no restriction on its use.


Accordingly, for 2005 your tax liability is the lesser of;


(1) your tax computed with the deduction for the repayment taken into account, or


(2) the tax computed without the deduction for the repayment (i.e. only repayments related to the 2003 and 2004 DI receipts included into income are excluded from this computation) reduced by the decrease in tax liabilities in 2003 and 2004 resulting from the exclusion of the DI payments previously recognized as ordinary income in those years.


Thus, you may choose whichever calculation method results in the lowest tax liability.  Remember, for purposes of the 2nd calculation, only consider the portion of the repayment related to the 2003 and 2004 amounts.  The portion fo the repayment related to the 2005 DI receipts will still be deducted in either computation method.


Here is an example of both method calculations:


Example: C receives salary of $400,000 from X Corp. in 1998 and includes it in gross income. C's tax liability for 1998, taking into account other income and deductions, is $150,000. In 1999, X Corp.'s accountants determine that C's department generated a loss in 1998 and C repays $100,000 of his 1998 salary in 2000 under a provision in his employment contract that reduces his salary if his department generates a loss. C's tax liability after deducting the repayment under IRC Sec. 1341(a)(4) is $145,000 (i.e. method 1 calculation). 


C's tax liability for 2000, ignoring the $100,000 deduction, is $180,000. C's tax liability for 1998, ignoring the $100,000 inclusion, is $122,000. Thus, the decrease in 1998 tax liability resulting solely from the exclusion of the $100,000 is $28,000 ($150,000 - $122,000). C's tax liability for 2000 under IRC Sec. 1341(a)(5) is $152,000 ($180,000 - $28,000) (i.e. method 2 calculation).   

       
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Christopher Phelps and other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Chris, I assume this tax deduction is recorded on ( 2nd method)
on line 69 Other Payments with "IRS 1341" written in the margin

Any deduction you take for the 2005 repayment, claim as a miscellaneous itemized deduction NOT subject to the 2% of AGI limitation.  The credit portion gets claimed on line 69 with "IRC 1341" noted next to the line.


See IRS Publication 525 at: http://www.irs.gov/pub/irs-pdf/p525.pdf pages 31 and 32.


Thank you for you payment.  Let me know if you have any other questions.

Customer: replied 11 years ago.
Thanks Chris, I guess I won't be using TurboTax this year. I'll
have to do it the old fashioned way, pencil, paper and calculator.
I'll let you know if there are any further problems. I'm going to
work through a scenario and see how it goes. If I have any
trouble I'll get back to you

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