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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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My wife received a lump sum disability payment of $81,320 from

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My wife received a lump sum disability payment of $81,320 from Social Security in 2008. We had to reimburse our disability insurance $49,563 of the $81,320. Can we deduct the $49,563 reimbursement payment to the insurance company?
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.
HelloCustomer

If the disability insurance payments which you had to repay were taxable income in the year you received them, then you may claim a deduction for the amount you had to repay.

The deduction can either be taken as an itemized deduction on Schedule A, which reduces your taxable income -- or it can be taken as a tax credit by going back to the previous tax year when you received this payment, and re-figuring what your tax would have been without including this as income.

I am giving you a link below to the section of the IRS website which explains this in more detail. Refer in particular to the section entitled "Misc Expenses - Repayments over $3,000"

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

Thank you.

http://www.irs.gov/publications/p535/ch11.html
Customer: replied 8 years ago.

To clarify, the lump sum SSDI payment received in 2008 covered prior years - 2005 ($5,814), 2006 ($24,424), 2007 ($25,248) and 2008 ($25,834). No taxes were paid on these amounts, as we did not know the SSDI would be approved. The majority of this lump sum ($49,563) was paid back to the insurance company in 2008 to offset prior payments from private disability insurance. However, the private disability insurance payments were not taxable. So, no tax has been paid to date on any disability payments. In reading the info on the IRS link, there are several mentions to how the payment was handled in prior years. What I'm understanding from your reply is that we can deduct the $49,563 as misc expenses on Schedule A. Can you please confirm?

Expert:  Merlo replied 8 years ago.
Hello againCustomer

No, that is not what I am saying here. If you will look again at what I said in my first post -- "If the disability insurance payments which you had to repay WERE TAXABLE INCOME in the year you received them", then you may claim a deduction.

You said that prior to your wife receiving her lump sum SS disability payment, she was receiving disability insurance payments, and you ended up having to repay some of those disability insurance payments. You can claim that repayment as a deduction ONLY if those payments were included in your taxable income to begin with.

If the payments your wife was receiving from the private disabiity were never included in your taxable income to begin with, then you cannot now claim a deduction for money that you had to repay, since you never paid tax on that money to begin with.

If the payments your wife had received from the private disability had been taxable income to you, then you could claim a deduction for having to repay a portion of that money back to the company.

Thank youCustomer

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