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Question for the Money Doctors

Question submitted on May 10, 2013.

Question

The estate of a deceased client received after her death, over $ 99,000 in SSDI covering many years. The check was made payable to the estate.
How and where does this get taxed?
If on Form 1041, do I only include 85%,

Answer

This has to be a very unusual fact pattern that gave rise to this situation. You should be aware that the Social Security Administration is quite diligent about collecting any amounts that might have been paid in errror. So, if there's any doubt about whether the decedent was actually entitled to receive this payment, the executor may want to hold this amount in reserve just to be safe. Assuming that it was paid correctly, the proper reporting of this is not likely to be addressed in any specific guidance issued by the IRS. In other words, the instructions to the Form 1041 are not going to cover this situation since it is so unusual. The SSA-1099 should have the tax ID of the estate and therefore should be reported on the Form 1041 as you suggested. Section 86 of the Internal Revenue Code provides for reporting of a maximum of 85% of Social Security benefits depending on whether certain income levels are met. That section does not indicate that it would be limited only to taxpayers that are individuals, so it would seems to be available to provide some relief to the estate here. Publication 915 available on http://www.irs.gov/pub/irs-pdf/p915.pdf addresses many questions about reporting Social Security benefits generally and you may wish to take a look at it. Unfortunately it does not expressly address your situation, but you should take a look at Worksheet 4 in Publication 915. This may help you determine whether the estate is eligible to make a special election under IRC Section 86(e) which if it applies could reduce the portion of the payment that would be subject to taxation. Whichever method you use to report this payment, you should include enough information with the return for the IRS to fully understand your reporting position. If you are not experienced at preparing tax returns, you may wish to consult with an experienced CPA as you have a very unusual transaction to report.


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