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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16576
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Please explain the income tax treatment and liability

Customer Question

Please explain the income tax treatment and liability arising from the payout of social security benefits covering a person's last complete month of life, which is said to be paid in the month following death. If that payout is effected before the person dies, the amount may remain in the recipient's account. If the person died before the benefit was actually direct deposited, SSA deems the deposit the equivalent of non-negotiable as the person is not alive to transact (equivalent of signing a check) and SSA may (but not always) seek to claw it back (fraud concerns). If the latter happens, the benefit amount can be redirected to the qualified relatives (wife, children, parents) or if none, to the personal representative. What is the tax treatment of such re-issued final soc sec benefits, and is this the equivalent of a IDD from the decedent's 1048 if the payout was after the date of death? If SSA did not claw back an "earned" final soc sec benefit, what's the best pathway SSA and taxwise?
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

Thank you for your question --

If the social security recipient was not alive on the last day of the month, they do not get a benefit the following month. Social security usually does claw it back, and if it's realized years later then they can ask whoever took the benefit for repayment.

There is a $250 one time death benefit -- and that is not taxable to who receives it. I believe that it is the benefit that you are talking about.

Please let me know if you need anything additional. If not, please rate positive.

Customer: replied 1 year ago.
Hello Megan. I received your initial response.As follow-up, I will try to clarify the question. Rather than the $255, I am concerned about the social security benefit covering the last full month of life (Dec 2014), paid out in the month of death (Jan 2015), but in this case, not before the recipient had died. At the time, as personal rep, I did speak to two SS help desk people and got conflicting answers. One said return the deposited benefit and use SSA form 1724 to apply for the benefits, which were, indeed, earned (retrospective payment of benefits), and the other said keep the deposit in the account as it was earned. I have done the latter, and now seek the best way to proceed; either a) find a way to return the last month's benefit, file the 1724 requesting the payout be made to the two adult sons, and assuming no income tax consequences to the estate, or b) keep the deposit. Unfortunately, I do not have an SS 1099 for 2015 (due to forwarding and changing addresses), but one of the sons could visit the local SS office to clarify. if the benefit remains with the estate, I would prefer to distribute the final benefit o the two adult sons as IDD (which may affect the AMT calculation for the estate 1041). Are both approaches possible, or do I need to return the benefit amount to SS and apply with the 1724 for reissue. Am I correct that any tax liability would shift to the sons, with no tax liability arising for the estate? thank you.
Expert:  Megan C replied 1 year ago.

They were confused. The amount that was received for the month prior to the death would not be clawed back - but the payment for the month after they died would be clawed back if they were not notified.

You need to keep the deposit. Don't give it back - it will take FOREVER to get it back.

In this case, the payment is received after death by the estate. It's the estate's income -- and with such a small amount the tax is going to be a relatively small. There's no way to shift this to the sons via social security. If distributed, of course you can handle the passage of the tax attributes in that regard

Thanks

Customer: replied 1 year ago.
Thank you, ***** ***** agree it would be easier just to keep the deposited final benefit (which is why I didn't force the bank to send the deposited benefit back to SSA at the time); also, there was a notation on the account from Treasury, which I think was effectively a death alert, supposedly to the bank (I guess I need to clarify this) .. However, you mentioned in your earleir response that if SSA realizes the situation at some later date, it could request the return and then the "1724" process would begin. Would it be incorrect to force the bank to return the SS deposit (from funds in the estate account) and then go though the 1724 process? The delay is less of an issue than avoiding loose ends and unnecessary tax liabilities. If the funds end up being re-issued by SS to the sons (please tell me why you mentioned that payout to the sons is not possible), then wouldn't the tax liability be with the sons. I am trying to reduce the 1041 income to the estate, and if I did keep the SS benefit in the estate, I would plan to declare the SS benefit as IRD income on the 1041 and then shift it out with the IDD process. ??
Expert:  Megan C replied 1 year ago.

If the funds were returned to social security, of course they would issue to the sons or the estate. However, it is unnecessary to do that. And just use the IDD process -- should be easier.

Please let me know if you need anything additional. If not, please rate positive.