Do I have to pay tax on my SSDI overpayment if I already paid tax on the disability insurance benefits for the same period of time?

As disability insurance attorneys we are not qualified to give any tax advice. Some disability claimants are taxed on the disability benefits that they receive each month. What happens when a disability claimant is approved for SSDI and then the disability carrier demands a repayment for the gross pre-tax disability benefits that have already been taxed? In this scenario the claimant is now being faced with having already paid tax on the disability insurance benefits and having to pay tax on the SSDI benefits as well.

We reached out to Gary Kaplan, a certified public accountant to provide some general information on this issue. If you have specific tax questions we suggest you contact an accountant.

Issue

Is there any tax relief for repayment of previously taxed disability payments?

Hypothetical Facts

Mr. Samson received monthly long-term disability benefits for 2.5 years (July 2008 – December 2010). Since he originally paid disability insurance premiums with pre-tax dollars, Mr. Samson’s disability benefits were taxable in the 3 prior years when he received the money. On January 1, 2011, Mr. Samson was finally awarded retroactive Social Security benefits for the 2.5 prior years. He is now required to pay the gross amount (i.e. before-tax) of disability benefits back to the disability insurance company, even though he already paid tax on those benefits.

Law And Analysis

Under Section 1341 of the Internal Revenue Code, if an item was included in gross income for a prior taxable year (years) because it appeared that the taxpayer had an unrestricted right to such item, a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item.

Tax treatment will occur in the tax year of repayment, and will depend on the amount repaid.

A. Repayment of $3,000 or less: The taxpayer must deduct the gross amount of disability income repaid in the current year as a miscellaneous itemized deduction on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) limitation. Note that if the taxpayer does not itemize, or the repayment is less than 2% of AGI, there will be NO relief for taxes paid in any prior year.

B. Repayment over $3,000: There are two options available that can be used. One must compare the effects of treatment in both options; the taxpayer can use the one that results in the least overall tax effect:

  1. Current year treatment: Deduct the gross amount of disability income repaid in the current year as a miscellaneous itemized deduction, as described in (A) above.
  2. Prior year treatment: Recompute the tax for each prior year as if the disability income had not been reported that year. The difference between the recomputed tax and the actual tax can be claimed as a tax credit on the current year’s 1040.

Example:
Mr. Samson repaid $15,000 in 2011 that he previously included as income on his 2008 – 2010 income tax returns. He figures what his tax benefit would be under each available option:

  1. A 2011 miscellaneous itemized deduction: Net tax benefit = $3,400.
  2. The sum of credits for 2008, 2009 & 2010 recomputed income tax if disability income payments received were not included in taxable income in each respective years: Net tax benefit = $3,750.

Mr. Samson would choose option 2, which has the greater net tax benefit. He would enter $3,750 as a tax credit on his 1040 return for 2011.

Conclusion

Taxpayers who repay over $3,000 previously tax gross disability income can recoup up to all prior tax paid, depending if an itemized deduction or a credit for prior year taxes will result in the least amount of tax in the current year. Taxpayers repaying $3,000 or less in the current tax year can only recoup any prior tax paid if they itemize and the repayment is more than 2% of AGI.

This case study does not consider the tax treatment of Social Security disability payments, or other issues that may affect your particular situation. Tax planning for disability payments and other complex issues should be made with the help of an experienced tax professional.

If you have specific questions about tax issues related to disability insurance, Gary Kaplan can be reached at 866-643-3560 or by visiting his website at gkaplancpa.com.


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Sedgwick

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Reviewed by From a great job to a complete nightmare on March 20th 2024   Verified Policyholder | March 2024 date of disability
My Physician recommended that I take some time from a toxic environment after several deaths in my family coupled with AT&T trying to run tenured employees out of the door... read more >
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Keeps claiming they will not approve claim for pre existing conditions but my illness is not preexisting

Reviewed by M.T. on February 15th 2024   Verified Policyholder | May 2023 date of disability
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Reliance Standard

Staff Lie

Reviewed by Tanya on February 12th 2024   Verified Policyholder | August 2021 date of disability
I had my disability cut off the day I was scheduled to find out whether I should have surgery. The claims examiner was aware that I had an appointment on that date and sai... read more >
Reply
Sent on February 12th 2024 by Attorney Gregory Dell

I am sorry to hear about your experience. It’s crazy that Reliance Standard would deny your disability benefits when you are suffering so badly that you need surgery.... read more >

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Reviewed by Becky H. THOMAS on February 12th 2024   Verified Policyholder | February 2024 date of disability
Dislike how they are constantly interrupting the lives of their disabled EE's whom are entitled to benefit which they paid into out of there pay check every pay period onl... read more >
Reply
Sent on February 12th 2024 by Attorney Gregory Dell

Thank you for your review of Hartford and we appreciate you sharing.  It’s sad they don’t take care of their own employees.

Lincoln Financial

Never received benefits my entire leave - or help with them

Reviewed by Anna on December 19th 2023   Verified Policyholder | November 2023 date of disability
I used my short term disability insurance for maternity leave and started the process beforehand knowing when I would be out (scheduled induction.) It took a little over a... read more >
Sun Life

Unscrupulous Tactics

Reviewed by Misseekayy on December 19th 2023   Verified Policyholder | May 2023 date of disability
Sunlife uses unscrupulous tactics in order to prevent payment of claims. They wait until it is close to the 30 day mark and then they ask for another form of information o... read more >
Sedgwick

Lame

Reviewed by Dennis T. on December 11th 2023   Verified Policyholder | March 2022 date of disability
My experience with Sedgwick and personell is as follows: Unhelpful, unprofessional and an overall unpleasant experience.
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Low payments

Reviewed by Dorothy on November 30th 2023   Verified Policyholder | November 2023 date of disability
I was injured at work. I did house keeping in a hospital. I tore just about everything imaginable in my knee. I was let go from my job, because I was no longer able to do ... read more >
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Our goal is to get your application for disability income benefits approved. Applying for disability insurance benefits can be a difficult process and the information you provide is critical. Most disability insurance companies look at your application in hopes of finding a reason to deny your claim. Your disability company will ask you to complete numerous forms, interview you, request lots of information, speak with your doctors and possibly request to have you examined by their "hired gun" doctor.

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Who are Dell Disability Lawyers?

We are disability insurance attorneys that know how to get your short or long term disability benefits paid. As a nationwide law firm we have helped thousands of disability insurance claimants throughout the United States to collect hundreds of millions of dollars of disability insurance benefits from every major disability insurance company.

In more than 98% of our cases, our attorneys have been able to either get our clients paid monthly disability benefits or obtain a one-time lump-sum settlement. Our disability insurance lawyers have seen it all when it comes to disability insurance claims and we know exactly what it takes for your disability claim to be approved.

We offer disability insurance attorney representation nationwide and we welcome you to contact any of our lawyers for a free immediate review of your disability claim. We also invite you to visit and subscribe to our YouTube channel where we have more than 850 videos and regularly provide tips to help protect your disability benefits.

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Our disability insurance attorneys help individuals that have either purchased a long term disability insurance policy from an insurance company or obtained short or long term disability insurance coverage as a benefit from their employer. We have helped individuals in almost every type of occupation with monthly disability benefit payments ranging from $1,500 to $50,000.

Our clients include all types of employees ranging from retail associates, sales representatives, government employees, police officers, teachers, janitors, nurses, pilots, truck drivers, financial advisors, doctors, dentists, veterinarians, lawyers, consultants, IT professionals, engineers, professional athletes, business owners, and high level executives.

A strong understanding and presentation of the duties of your occupation is essential for securing disability insurance benefits.

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Yes. We are a national disability insurance law firm that is available to represent you regardless of where you live in the United States. We have partner lawyers in every state and we have filed lawsuits in most federal courts nationwide. Our disability insurance lawyers represent disability claimants at all stages of a claim for disability insurance benefits. There is nothing that our lawyers have not seen in the disability insurance world.

What are your fees?

Since we represent disability insurance claimants at different stages of a disability insurance claim we offer a variety of different fee options. We understand that claimants living on disability insurance benefits have a limited source of income; therefore we always try to work with the claimant to make our attorney fees as affordable as possible.

The three available fee options are a contingency fee agreement (no attorney fee or cost unless we make a recovery), hourly fee or fixed flat rate.

In every case we provide each client with a written fee agreement detailing the terms and conditions. We always offer a free initial phone consultation and we appreciate the opportunity to work with you in obtaining payment of your disability insurance benefits.

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No. For purposes of efficiency and to reduce expenses for our clients we have found that 99% of our clients prefer to communicate via phone, email, fax, or video conferencing sessions. If you prefer an initial in-person meeting please let us know. A disability company will never require you to come to their office and similarly we are set up so that we handle your entire claim without the need for you to come to our office.

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When you call us during normal business hours you will immediately speak with a disability insurance attorney. We can be reached at 800-698-9159 or by email. Lawyers and staff must return all client calls same day. Client emails are usually replied to within the same business day and seem to be the preferred and most efficient method of communication for most clients.

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