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When you collect on a SSDI settlement there are a number of issues to consider for taxabiliy. Can I offset any of the income with the amounts I had to repay from private disability insurance? Is the settlement taxable? How much is taxable? and, Can I make a Lump Sum Election with the IRS? Let's go through each of them.
1. Can I offset the income? Yes, if you had private disability insurance that now requires repayment you can offset the income from the settlement with the amount repaid. As an alternative, you can get a tax credit for the amount repaid, which may be more beneficial than the offset approach, you can take whichever gives you the greater benefit.
2. Is the award taxable? Yes, but only if, filing singly you have other income over $25,000 or jointly, other income over $32,000. If you have less than that it is not taxable and if you have more, it is taxed on a sliding scale up to 85%. Granted the 15% non-taxable amount is not a huge break but don't turn it down. Better still, neither New York nor New Jersey tax any social security payments, so it is only the tax payable to the IRS you need to worry about.
3. How much is taxable? While it is often 85% of the amount collected, the actual amount is often less than the maximum. Taxability is zero when your total income is under $25,000 single or $32,000 married, above those thresholds the taxable amount increases fairly quickly to 85% of the amount collected is subject to income tax. .
4. Is there a lump sum election? Yes, there is. The details on the settlement will give you instructions on what portion of the money applies to what years. If it is to your benefit, and it often is, you can calculate the tax due as if you received it in those earlier years. Better still, you do not have to amend those years, which is a time consuming and expensive process, you submit the entire tax on the current year tax return. Just keep the required forms and disclosures for the lump sum election on hand in case the IRS wants to see them.
 Don is a CPA, CFP, PC and MBA with over 20 Years of experience. He has grown his practice through a strategic focus followed up with attention to detail and flawless execution. He has built up his practice by referrals, where he has maintained a national following, with many clients that have been with him since he started his practice. For a complimentary no obligation consultation call 201-646-0020 or visit www.dwrifkincpa.com
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