| Sometimes a taxpayer will receive Social Security | | | | cash for the lump-sum payment. For example, if |
| benefits in one lump sum. A taxpayer might have | | | | the taxpayer had been receiving SSI and the |
| to pay income taxes on up to 85 percent of | | | | Social Security Administration determines that the |
| these benefits. However, a taxpayer may make | | | | taxpayer should have been receiving Social |
| an election under Section 86(e) of the Internal | | | | Security disability benefits, the Social Security |
| Revenue Code to minimize the income tax on the | | | | Administration will reduce the disability benefits by |
| receipt of the lump-sum Social Security benefits. | | | | the amount of the SSI paid to the taxpayer. The |
| Why would a taxpayer receive lump-sum Social | | | | taxpayer will receive a Form 1099-SSA showing |
| Security benefits? A taxpayer could have been | | | | the amount of the lump-sum Social Security |
| receiving Supplemental Security Income (SSI), | | | | disability benefits and yet the taxpayer received |
| which is tax free. Then, the Social Security | | | | little, if any, cash. |
| Administration determines that the taxpayer | | | | Section 86(e) of the Internal Revenue Code |
| should have been receiving Social Security | | | | allows a taxpayer who receives lump-sum Social |
| disability benefits for the last several years | | | | Security benefits to elect to include in gross |
| instead of SSI. Another reason that a taxpayer | | | | income only the sum of the Social Security |
| could receive Social Security benefits in one lump | | | | benefits that the taxpayer would have included in |
| sum is that the Social Security Administration | | | | gross income in prior years if the taxpayer had |
| may have initially denied the individual's application | | | | received the benefits in the years to which the |
| for Social Security disability benefits, but the | | | | lump-sum payment is attributable. A taxpayer |
| individual wins those benefits on appeal. | | | | may also make the election if the taxpayer |
| Social Security benefits are not taxable for | | | | received Railroad Retirement benefits in one lump |
| taxpayers with relatively low amounts of adjusted | | | | sum. |
| gross income. At moderate levels of adjusted | | | | Section 86(e)(2)(B) states that the taxpayer |
| gross income, 50 percent of the Social Security | | | | should make the election in the manner prescribed |
| benefits are taxable. At high levels of adjusted | | | | by the Secretary of the Treasury in regulations. |
| gross income, 85 percent of Social Security | | | | However, the Secretary of the Treasury has not |
| benefits are taxable. | | | | issued any regulations under Section 86. Once a |
| This graduated system for including Social | | | | taxpayer makes the election, the taxpayer may |
| Security benefits in gross income and the | | | | not revoke it with the consent of the IRS. |
| progressive nature of income tax rates can have | | | | Because no regulations exist that prescribe the |
| a very bad effect on individuals who receive | | | | manner of the election, a taxpayer should make |
| lump-sum Social Security benefits. Such individuals | | | | the election according to the guidance the IRS |
| might have to pay a much larger amount of | | | | provides in IRS Publication 915, "Social Security |
| income taxes than they would have if they had | | | | and Equivalent Railroad Retirement Benefits." IRS |
| received the Social Security benefits when they | | | | Publication 915 has helpful worksheets and other |
| should have received them. If the taxpayer does | | | | information about making this election. Taxpayers |
| not take action to make an election allowed by | | | | who received Social Security benefits or Railroad |
| Section 86(e) of the Internal Revenue Code, that | | | | Retirement benefits in one lump sum should |
| is what will happen. | | | | consult IRS Publication 915 and determine whether |
| Sometimes the taxpayer does not receive any | | | | the election will reduce their taxes. |