Retirement 2.0blog

Tax break for repaying Social Security benefits

You can claim an itemized deduction or possibly a tax credit

Dec 6, 2013 @ 11:59 am

By Mary Beth Franklin

+ Zoom

As more Americans begin to realize the value of delaying their Social Security benefits, some are rethinking their decision to claim reduced benefits early.

You have 12 months from the date of your initial claim to change your mind. If you do, you can file Social Security Form 521 to withdraw your benefits claim. But you must repay all the benefits you have received, plus those of anyone else who has received benefits on your earnings record, such as a spouse or dependent child.

Withdrawing your claim for Social Security benefits wipes the slate clean. When you apply for benefits later, it will be treated as a first-time claim and your retirement benefits will be based on your age at that time. The older you are, the bigger your benefit, up to 70 when delayed retirement credits end.

Thomas McManus, senior vice president at Atlantic Asset Management, asked me for help with his plan to repay his Social Security benefits.

“I started collecting Social Security benefits in March 2013,” Mr. McManus wrote in an e-mail. “I plan on repaying the payments received either in January or February of 2014 so that I can collect a larger benefit two or three years down the road.”

Mr. McManus, who is 66 and still working, added: “I am assuming the money I got from Social Security this year has to be added to ordinary income for tax purposes.”

That's correct. Depending on his income and filing status, a portion of those Social Security benefits may be taxable.

To determine if your benefits are taxable, add half of your Social Security benefits to all of your other taxable income plus any tax-exempt interest to determine your “provisional income.” If you are single and the sum of your provisional income is $25,000 or more, some of your Social Security benefits will be taxable. If married, the threshold for taxing Social Security benefits of joint filers is $32,000.

These thresholds are not indexed to inflation, so each year, more of your benefits may be taxed, as Social Security benefits usually increase each year because of cost-of-living adjustments.

Mr. McManus asked if he is eligible for a tax break once he repays his Social Security benefits to account for the fact that he has already been taxed on some of that income.

Yes, he is.

Internal Revenue Service Publication 915 (Social Security and Equivalent Railroad Benefits) explains how to claim a tax break for the year you repay your Social Security benefits.

On Page 15, the IRS publication notes that if the amount shown on your Form SSA-1099 is a negative number (meaning you repaid benefits you had previously received), you can claim an itemized deduction for the part of this negative figure that represents the benefit you included in your gross income in earlier years.

The publication also notes that if the deduction is $3,000 or less, it is subject to the 2% -of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Claim it on Schedule A of your tax return.

But if the deduction is more than $3,000, you have another option. It involves more-complicated calculations, but you can choose between a tax deduction or a tax credit, if that would result in bigger savings.

Mary Beth Franklin is a contributing editor for InvestmentNews.


What do you think?

View comments

Recommended for you

Featured video


Stephanie Bogan: What's really holding advisers back from achieving their goals

The only thing holding financial advisers back from accomplishing what they want is the assumptions they're making, according to Stephanie Bogan, founder of Educe Inc.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.