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In addition to processing the Social Security lump sum taxation, you can claim a deduction or credit for the $37,600, as follows:
First, if you repaid the money to the disability company in 2010, you subtract the repaid amount attributed to 2010 from the payments before reporting it.
Aside for that, for each year for which you repay the insurance company:
If it's over $3000, you have the option of taking an itemized deduction (not subject to the 2% limit) in the year repaid, or taking a credit on the tax return for the year repaid, of the amount of tax in that year (2007-2010) due to the disability income.
If under $3000, you only have the option of taking an itemized deduction (subject to the 2% limit) in the year repaid.
The legal expenses are deductible as miscellaneous itemized deductions subject to the 2% limit in the year paid.
Publication 915, and the examples in publication 17 referring to the "claim of right" deduction and credit, only apply to single years, as well. You need to do the calculation for each year, and have a separate option of deduction or credit for the repayment applicable to each year. I don't know whether, if you elect the Lump Sum calculation to determine the amount of Social Security income taxable in 2010, whether the virtual amended returns for the prior years include the back social security income attributed to those years. Publication 915, in the section "Repayments More than Gross Benefits", goes over the procedure, although it seems to state that only the total repayment needs to be over $3000, rather than the repayment attributed to each year.
So for the delay, but life intervened. I had what a cardiologist described as a "minor heart attack". and my wife (an RN) insisted that I put aside any stressors for awhile. I think i understand the answer. Thank you kindly for your time and assistance.