Chris Stein, CFP®
Social Security and Tax Brackets
A reader asks for confirmation of the rules around his mother retroactively filing for her Social Security benefit.
"My mom will hit her Full Retirement Age in July 2021 and was planning on claiming Social Security then. However, in 2021, my parents will be in the 22% tax bracket. But in 2022, since my mom will no longer be working, we are projecting them to be in the lower-middle end of the 12% bracket (after factoring in standard deductions and including their new SS income). I believe she could file in January 2022, request a retroactive filing of up to six months, and Social Security would send her a lump sum check for those six months. If so, my question is whether the 6-month lump sum check would be in her 2022 taxable income (at the lower 12% rate). My gut is telling me, "yes," but I'd like confirmation before suggesting it to my mom. It doesn't seem like too much extra effort to save approximately $1,000 in taxes."
First, let me clarify a couple of things about retroactive claiming.
You can file a retroactive claim for Social Security, but there are limitations. First, you have to have reached your Full Retirement Age, and then you can only file retroactively back to your first month of Full Retirement Age, to a maximum of six months.
In this case, you say your mother could retroactively file up to six months. And she can because she will have reached Full Retirement Age in July 2021, early enough in 2021, so that Social Security could go back a full six months in January 2022.
But let's look at a couple of hypotheticals. If your mother reached Full Retirement age early, like in February or March 2021, once she gets to 2022, she can definitely take advantage of the full six months. But she cannot go back more than that. And if she only reached Full Retirement Age in December 2021, she'd only be able to go back one month.
You can backdate – or retroactively claim – back to your Full Retirement Age or six months, whichever is less. And if you file before reaching Full Retirement Age, you have to file as of the day Social Security starts you. You can't backdate your claim.
Social Security gives you this flexibility in case you reach your Full Retirement Age, and you forget to go in and claim. You can be made whole for the following six months.
But the essence of your questions was this: if she waits until 2022 and files a retroactive claim to collect the six months of benefits originally payable to her in 2021, would that money go on her 2022 tax return instead of her 2021 tax return?
The answer is yes. The IRS website tackles this question specifically in a Frequent Asked Questions section. If your mother files in January 2022, which is what you are suggesting she do, Social Security will start up her regular benefit. But then, at some point, they're going to give her a correction of the back pay for the 2021 months that she's retroactively claiming, and they give corrections as one lump sum.
Clearly, the payment will arrive in 2022, but it was payment for benefits in 2021. But the IRS doesn't care. The IRS says that you report on the tax return in the taxable year they were received, not earned.
So, this plan that you've devised should work. It is a way to collect those six months of benefits and expose them at the 12% bracket rather than the 22% bracket.