reduce taxes on Social Security

Dear Liz: Because of the Social Security Fairness Act, my wife got a huge lump sum check (catchup, I suppose) and will now get monthly Social Security benefits. This is good news and bad news, especially if we get kicked into a higher tax bracket and moreover if we have to pay taxes on that lump sum. Is there anything in the wings at the IRS that will provide some guidance as to the taxable or nontaxable (ha-ha) nature of that lump sum?

Answer: Taxes on Social Security are typically based on your “combined income” for the year. Combined income is your adjusted gross income plus any tax-exempt interest and half your Social Security benefit. If you’re married filing jointly and your combined income is between $32,000 and $44,000, you typically would pay tax on up to 50% of your benefits. If your combined income is over $44,000, you would pay tax on up to 85% of your benefits.

Normally, a lump sum for back benefits would be taxable in the year it was paid out, but there is an option called the Social Security lump-sum election method, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. You can elect to calculate the taxes as if you received the benefits in the year they were due.

You’ll find worksheets in IRS Publication 915 to help with your calculations. Essentially, you’ll determine what portion of the lump sum payment would have been taxable in each prior year. You’ll subtract any previously reported taxable benefits, then add the remainder to your current year’s taxable income, and check line 6c on Form 1040 or 1040SR, Luscombe says.