My name is***** and I will be helping you with your question today. This is for informational purposes only and does not establish an attorney client relationship.
I understand your frustration. Unfortunately, you do have to pay taxes on the "income" paid to the attorney as you essentially earned it and then paid it to the attorney but the IRS gives you many ways to minimize your taxes. While you might have to pay taxes on a small portion of your lump sum payment from Social Security, the IRS does not penalize disability beneficiaries for receiving past-due benefits all in one year. Federal law provides that individuals can apportion past-due benefits to previous years, thus lowering or eliminating the taxable amount of their lump sum per year, without having to file amended tax returns.
Social Security sends beneficiaries a form called the SSA-1099 each year they receive benefits. If you're receiving this form for the first time, it should state in Box 3 the exact amount of your lump sum that was accrued during previous years. Each year will be listed separately alongside the total amount paid for that year. Rather than requiring you to file amended returns for those years, the IRS allows you to handle it all on your current tax return, using prior years' income amounts. This method is discussed in IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits.
Whether you'll owe federal income tax while receiving Social Security disability depends on whether you file individually or jointly and how much "provisional income" you report. Provisional income includes your adjusted gross income (AGI), any tax-exempt interest you earned, and half of your Social Security disability benefits.
If disability benefits are your only source of income, you'll almost certainly not owe any federal income tax. But if you're filing as an individual with provisional income between $25,000 and $34,000, up to 50% of your disability benefits are considered taxable income. If you have provisional income over $34,000, 85% of your benefits are taxable.
If you're married filing jointly and have combined income over $32,000, up to 50% of your disability benefits are taxable. Combined income over $44,000 will cause 85% of your disability benefits to be taxable. Remember that the 50% and 85% figures refer to the amount of income that is taxable, not to your marginal tax rates. Any disability income that is taxable will be taxed at your ordinary marginal rate (which, for most people, is between 10% and 28%).
Please let me know if you have any further questions and please positively rate my answer if satisfied. There should be smiley faces or numbers from 1-5 to choose from. This extra step will cost you nothing extra and will ensure that I will be compensated for my time by the site.