Disability Payments

The taxability of disability payments can vary significantly, depending on how the payment(s) are received.  Due to the length of time that can occur between applying for these benefits, oftentimes when they are received, the benefits may cover multiple years.
How do you report these on your tax return?  These multiple year payments are identified as “lump sum” payments.  The IRS allows taxes on lump sum payments to be spread over previous tax years using your current year return.  That means you do not need to go through the hassle and expense of filing amended returns for previous years.  Lump sum payments can be found in Box 3 of the form SSA-1099 that you receive from the Social Security Administration.
Also, be aware that even if your total income is below the amount required to file an income tax return, you could be missing out on a refund from the earned income tax credit calculation.  The maximum amount of the credit for taxpayers with a disability is $7,500.   A dependent care credit may also be possible if you care for someone with a physical or mental impairment.     
Some of these calculations can be confusing and difficult to make, so if you believe any of the above items relate to you, please see your tax professional for additional information.   They can assist you in the correct reporting of your social security disability benefits as well as making sure you take advantage of tax credits available to you.
/posted by Vickie Tischendorf, CPA