Chris Stein, CFP®
Taxation of Retroactive Social Security Benefits
A reader from Kentucky looks for clarification on the taxation of retroactive Social Security benefits.
“My question concerns Social Security. I am at my Full Retirement Age (FRA) now and am delaying my claim for about 20 months. If I choose to claim retroactive benefits, are benefits taxable in the year I receive them? Or will SSA issue a revision to the prior year’s reported SS earnings for any portion of retroactive benefits that would have been paid in that year had I not delayed?”
The answer to your first question is “yes.” Your benefits will be taxable to you in the year you receive them. Social Security does not revise and back-date its reports so that you have to file an amended tax return for the previous year because they are technically paying you for benefits from the previous year.
You mentioned “retroactive benefits.” Let’s first define what they are.
Most people don’t realize that you can claim retroactively for up to six months of benefits when you first claim Social Security retirement benefits, as long as you are at least six months past your Full Retirement Age (FRA). If you aren’t, you can only claim the number of months back to your FRA month. And if you haven’t reached your FRA yet, you can’t claim retroactively at all.
Social Security retirement benefits increase by a certain percentage for each month you delay starting your benefits beyond FRA, up to age 70. When you claim retroactively, you lose those delayed retirement credits, and your benefits will be calculated to reflect the earlier filing date. You will be paid a one-time lump sum for those interim months.
Let’s look at some examples. Say you reached FRA last month and missed claiming your retirement benefits. You rush into the Social Security office and say, “Oh, I meant to file last month when I reached FRA. Can you help me?” They will say, “Yes, we can retroactively claim back to your FRA.” They will back-date your application, you will get paid for the month you missed, and all of your benefits will be based on calculations back at your FRA (one month earlier).
A pretty typical case of delayed benefits payment occurs with Social Security disability benefits. Claims are often denied initially but approved later on. You can be owed disability benefits for years of delay. You will get one large lump-sum payment, which will be reported in the current year. All you can do is bite the bullet and recognize all that income in the current year. Not only can you not go back and file revised tax returns, but you’re prohibited from doing so.
In your scenario, you will have waited 20 months beyond your FRA by the time you claim, but that 6-month rule will limit how far back you can claim.
Your question is this: if that 6-month period spans back into a previous calendar year, how will you handle reporting the Social Security income for tax purposes? Will the payment be considered income in the previous year since it represents benefits earned in that year? Or will it be considered income in the year in which you receive the payment?
To repeat, Social Security will calculate what it owes you and make a lump-sum payment for the months you are claiming retroactively. They will report the income in the current year.
Sometimes, delaying benefits payments can be an advantage or disadvantage, depending on your tax situation. A reader once discussed being intentional about his timing. Something was going on in the year he originally intended to claim. He wanted to know if he could delay until after the first of the year, then claim retroactively, and avoid adding to his tax burden in the previous year.
Again, the answer was yes. Income can be shifted from a previous year to a current year in this way. Social Security is going to report the payment on current-year taxes – the year they send the payment. They’re not going to revise last year’s Benefits Statement and have you change last year’s tax return. However, as a strategy, it’s only possible when you are first claiming. It’s not something you can do after you have claimed.
That will be your case, too. The year you submit your application and receive the payment from Social Security for the six months of retroactive benefits is the year the income will be reported, even though it was for benefits earned in a previous tax year.