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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I am 69 & have received social security since May 2006. Im

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I am 69 & have received social security since May 2006. I'm researching the "buyout" option--via SS form 521--and I understand I can file amended tax returns to recover tax paid on the higher AGI. My two principal Qs are: Is this the fact; and am I limited to going back 3yrs? I invite you to note any downsides to this plan.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
Hello wlawson,

When participating in the SS Buy Back option, you do not actually file amended returns for prior years where you received benefits. When you repay benefits to SS that you received in prior years, you may choose one of two methods for claiming a credit for the tax you paid on those benefits.

1. You may claim the entire amount that you repaid as an itemized deduction on Schedule A in the year that you made the repayment. This would reduce your taxable income by the amount of the repayment. Using this option, your credit is limited to your other income for the year. As an example, let's say that you repay $50,000 worth of benefits in the year 2009. If you list that $50,000 as an itemized deduction on Schedule A, then it reduces your other income for 2009 by that amount. If your other income for 2009 is only $40,000, then you lose the benefit of the full deduction. If that is the case, you will want to consider using option #2. Listing the repayments amount as an itemized deduction on Schedule A is also limited to the amounts which exceed 2% of your AGI for the year.

2. Using this option you would go back and re-figure your taxes for prior years, and figure what you would have owed if these benefits had not been included in that year's return. You are not limited to going back 3 years using either option. You may go back as many years as you repaid benefits for. After you figure what your tax would have been versus what you actually paid, you then add those tax credits up for all the years involved, and take that as a direct credit against your current year's tax on line 68 of Form 1040. By using this option you get the full refund you are due, regardless of the income you had in the current year.

As an example, let's say that you pay back 4 years worth of benefits. You would go back and refigure your tax returns for the past 4 years and see how much tax you would have owed without these benefits being paid. Let's assume that for each of the last 4 years your taxes would have been lower by $1,000 each year. What you do is claim a credit for the total $4,000 in tax overpaid in the prior 4 years on your current year return. On the current year's return, even if it ends up that you owe no tax for the year, you still get a refund check for the $4,000 you overpaid in prior years.

Using option #2 you do have to go back and refigure your prior year's taxes, but you do not actually file amended returns for those years. You simply add up the credits due for each year and take that all as one credit on your current year's return.

http://74.125.95.132/search?q=cache:Ows-4Dle6RwJ:www.irs.gov/publications/p17/ch11.html+irs+social+security+repayment&cd=1&hl=en&ct=clnk&gl=us

You ask about the downsides to this plan. There is really only one downside, and that is the fact that even though you will now receive higher yearly benefits from SS, it would still take you several years to first recoup what you paid back in. If something were to unexpectedly happen to you shortly after completing this Buy Back, you would never have the opportunity to recoup the amount you repaid. And while this would not affect you personally, it would have an effect on what remains of the assets you want to pass on to your heirs.

If this was helpful please press the Accept button. Positive feedback is also greatly appreciated.

Thank you wlawson.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 3 other Tax Specialists are ready to help you
Expert:  Merlo replied 5 years ago.
Thank you wlawson,

If you have additional questions, just post them to the board and you may request that I be the one to answer. I will answer anything I can help you with and you can follow through later to retrieve the response if you do not have time to wait for it.

Customer: replied 5 years ago.
This followup question I would like Merlo to answer. Namely, the option #2 "credit" approach seems best since our gross income for 2009 will be in the $300 to $315 tho. range, including 85% of $26,500 in social security payments,n'est pa?
Expert:  Merlo replied 5 years ago.
Hello again wlawson,

Yes, you will most definitely want to use option #2.

If you use option #1, the deduction you claim is limited to the amount which exceeds 2% of your AGI. If your AGI for next year will be $300,000, then the first $6,000 of your repaid benefits cannot even be claimed. In your tax bracket, that would result in more than $2,000 tax credit that you woud be missing out on. So you will definitely want to use option #2.

If this was helpful please press the Accept button. Positive feedback is also greatly appreciated.

Thank you wlawson.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 3 other Tax Specialists are ready to help you

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