Are Social Security Repayments Tax Deductible?

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In 2011, you can repay Social Security benefits to take them later at a higher rate immediately -- possibly taking a tax deduction for this, too. The tax deduction for repaying Social Security can only have a neutral effect on your tax obligation. However, repaying your Social Security benefits to take a higher benefit later already gives a significant boost to your retirement income.

Identification

The Social Security repayment strategy works like this: You fill out form 521 for "Request for Withdrawal of Application," send Social Security a check for any benefits collected, and then reapply for benefits any time until the age of 70. If you paid any income tax on your Social Security benefits before "restarting" them, you can take a deduction or credit -- whichever reduces your tax obligation the most -- equal to the amount of income tax you paid.

Effect

Repaying Social Security benefits effectively becomes an interest- and penalty-free loan. If you withdrew money from any other pension plan, such as a 401k, you would have to pay income tax and possibly early withdrawal fees. Also, because the SSA pays benefits based on inflation, it is cheaper to do this than purchase other retirement securities, such an annuity -- an investment that pays out money for the rest of your life.

Claiming This Deduction

Form SSA-1099 or Form RRB-1099 will show you how many benefits you repaid in Box 4 and received in Box 3, which should result in a negative figure in Box 5. If you file a joint return, add Box 5 on yours and your spouse's forms together. If you have less than $3,000 in Social Security repayments to deduct, you can only deduct benefit repayments as a miscellaneous deduction, so only payments that exceed 2 percent of your gross income. Otherwise, deduct Social Security payments as an itemized deduction on Schedule A, or write “I.R.C. 1341” in the margin to the left of Line 71 on your Form 1040 if a tax credit lowers your tax bill more.

Warning

It can take several months before the SSA processes your Form 521. If you are in the middle of doing your taxes and "restarting" your Social Security benefits, contact your local SSA office if your SSA-1099 does not show a negative figure. Consult a tax professional if you cannot figure out if you benefit more from a Social Security repayment tax deduction or credit.

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