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Believe it or not, as a big federal agency, Social Security can make mistakes, and in some cases, will claim an overpayment of benefits. If you're returning money to Social Security, voluntarily or not, you will have a little extra tax accounting on your hands. The IRS wants you to make an adjustment to any benefits you received, for the purpose of figuring the rate of income tax you may owe on those benefits.
Forms and Reporting
If you're receiving Social Security benefits, the amounts you took in and/or repaid appear on Form 1099-SSA, which arrives in the mail in January for the previous year. The payments appear in Box 3, the repayments in Box 4 and the net amount in Box 5. This last number is the one used to make the income tax calculation; your benefits may be taxable depending on your filing status and the amount of other income you've earned.
If you've repaid more than you received, then you have a negative net benefit from Social Security. That means no income tax on the benefits you received. If you're filing a joint return, and both you and your spouse received the 1099, then you combine the net amounts showing in the two Box 5's. If the result is a negative, again, there will be no income tax due.
Offsetting the Net
If your net benefit is negative, you can take an itemized deduction, but only to offset a net positive benefit from a previous year. If you received $2,000 in Social Security benefits in 2012, for example, you would only be able to deduct $2,000 of a negative net benefit in 2013 (or following years).
Taking the Deduction
You take the repayment deduction on Line 23 of Schedule A, which lists itemized deductions that can be subtracted from your adjusted gross income. This rather obscure deduction is not broken out on the form; it simply comes under "Certain Miscellaneous Deductions." You must list the type and amount of each miscellaneous deduction using an attached sheet if necessary. Miscellaneous deductions, when combined, must be greater than 2 percent of your adjusted gross income to be deductible.
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