1. LUMP SUM ELECTION: When we win your case for you, due to the inherent delays in any governmental process, and the roadblocks placed by the government to impede, defeat, and delay your eventual entitlement to benefits, our clients generally receive benefits for more than one year. Many times you receive monies for three or more years of retroactive benefits. Because most individual taxpayers are what we call “cash basis” taxpayers, that is, they report income in the year they receive a check or payment, the receipt of these retroactive benefits is reportable in the year received. Because the tax laws advise that you do not have to “show” as taxable income a great part (if not all) of your Social Security benefits based on the amount of your Adjustable Gross Income, the receipt of “retroactive benefits” acts to defeat the intent of Congress, which was to exempt Social Security benefits from taxation. To overcome this unfair result, the Internal Revenue Code allows you to avoid this inequity through either Lump Sum Election, or amending your prior years. Since amending your prior years will probably cost you extra money to pay your preparer to do this, and may result in statutory interest on any resultant tax, the Lump Sum Election is usually the correct thing to do.

In short, to elect the Lump Sum Election, your tax preparer has to mark on the corresponding line of the first page of the form 1040 the letters “LSE.” The tax preparer then simply has to determine, on a year- by -year basis, the amount of Social Security benefits, which would have been taxable in the year to which you were entitled to the benefits. He/she then adds all the taxable amounts, and shows that amount on the 1040 filed for the present year. The Social Security Administration, on the form SSA-1099 (or form RRB-1099 for our Railroad Retirement Board clients) lists the amount of the income paid for each particular year, so determining the taxable amount of the benefits on a year by year basis is not a big deal.

If you want to do this yourself, it is really not hard to do. The IRS has printed a booklet entitled Publication 915 with a full explanation of the process, a “how to” section, together with worksheets to do the math.

2. Children and Auxiliary Benefits: The law is very specific. You only pay taxes on benefits to which you are entitled. If your children or other dependents receive benefits because of your Social Security or Railroad claim, those benefits go on their return. Almost without exception, children need not even report the income or file the return.

Correct tax reporting, and minimizing the amount of taxes due, usually requires an education and background in that field.

Finally, there are free services available to help you in preparing your tax returns. Be warned that these services use IRS trained volunteers. The Volunteer Income Tax Assistance (VITA) program is available to help low income tax payers. The Tax Counseling for the Elderly (TCE) program is available to help those 60 and older. (I no longer consider “60” to be elderly!) To find the nearest VITA or TCE site, please call (800) 829-1040.