Social Security Lump Sum Payment

Confusing Information From Social Security

Jerry was confused after the conversation with the Social Security agent and relayed his conversation to his financial advisor. The agent told Jerry it didnt matter when he claimed either in January or July. With either claiming date, Jerrys payments will be the same. How can that be?

While we often talk about DRCs as getting a boost of 8% per year up to age 70, the calculation is applied monthly. Waiting six months should permanently boost Jerrys monthly payment by 4%.

Why would the Social Security agent tell him he would get the exact same payment? Does Jerry need to claim a full year after FRA to turn on DRCs?

Why A Lump Sum Might Not Be Right For You

Even though these lump sums are sizable, many people don’t ask for them. Most people want to take benefits early, when lump sums aren’t available. And even if you wait, you have to give up something in return.

The Social Security Administration treats those who ask for lump sums as if they had applied for Social Security in the month corresponding to the earliest payment that becomes part of the lump sum. In the example above, if you turn 67 1/2 and ask for six months of benefits in a lump sum, the amount of those benefits will get calculated as if you had claimed right at age 67, not 67 1/2. That’d give you six times whatever your regular monthly payment would be, all at once.

By contrast, if you claimed regular benefits at age 67 1/2, your payment amount would get a 4% boost due to delayed retirement credits. So again, using the base $1,500 monthly amount, the trade-off for getting that $9,000 lump sum is that you won’t get a larger $1,560 Social Security check — both now and for the rest of your life.

Example: How Ssdi Backpay Is Calculated

Let’s say you applied for SSDI on July 3, 2021, and more than a year later, after an ALJ appeal hearing, the SSA approved your claim on August 19, 2022. And let’s say Social Security has set your EOD as March 15, 2020 .

In this example, your backpay would be calculated as follows:

With an EOD of March 15, 2020, your five-month waiting period would start on April 1, 2020 . Your waiting period would include all of April, May, June, July, and August of 2020. That would make your “date of entitlement” September 1, 2020.

In this example, you’d receive 11 months of retroactive disability benefits. These benefits would cover September 2020 through July 2021 . On top of these retroactive benefits, Social Security would pay you 13 months of past-due benefits, from August 2021 through August 2022 .

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Can You Ever Get All Your Ssi Backpay At Once

You can get an exception to the SSI lump-sum payment limit if you’ve been approved for SSI and have debts for certain necessities. That includes expenses related to your:

If you have such debts, you should tell Social Security about them and ask for an exemption from the lump-sum payment limits.

There are a couple of other times when Social Security will pay your SSI back benefits as one lump-sum payment. The SSA will send all your SSI back pay in a single payment if:

• you’re not expected to live at least twelve months after your approval, or
• you’re no longer eligible for SSI after being approved.

What Should You Do

Well, like most financial planning, it depends on several factors.

If John Smith decides to use the lump sum to pay off some high interest-bearing loan, it may make sense. However, if John has been waiting until age 70 to start taking benefits, it shows that he is disciplined and likely doesnt have much debt.

If he invests the lump sum well, he could end up with more money than if he had taken the higher monthly benefit.

If John is married and is the higher-earning spouse, it may make more sense to decline the lump-sum benefit in order to maximize his monthly benefit so that whichever spouse survives has the highest possible monthly benefit for life.

The right choice also depends on your and your spouses longevity.

If you are single and suddenly diagnosed with a terminal illness you may want to take the lump sum and the smaller benefit. The lump sum could go to an heir, while the monthly benefit will end at the beneficiarys death.

If you are married and facing a terminal illness, then the decision to take the Social Security lump sum benefit becomes a bit tougher to analyze. A higher-earning spouse faced with a suddenly shortened life expectancy may want to reject the lump sum. The reason is the survivor benefit will equal 100% of the higher earners benefit at his or her death. If the surviving spouse has a long life expectancy, the boosted survivor benefit can more than make up for declining the lump sum.

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Half Of Your Ssdi Benefits Are Taxable Each Year

Many people who rely on monthly social security disability payment as their sole source of income won’t owe taxes. However, reporting the lump sum as income for one tax year can result in owing taxes. You could end up paying more than you need to pay if you don’t get the right advice.

If you make between $25,000 and $34,000 each year, you may have to pay income tax on up t0 50% of your benefits, and if you made more than $34,000, you could owe taxes on up to 85% of your benefits. A federal income tax return must be filed if gross income is over a certain amount per IRS rules,” Gada says. Whether you owe tax due to the lump sum payment will depend on how much you receive and how much income you had during the tax years the payment covered.

Will I Lose My Ss Disability Insurance If I Get A Settlement Or Win A Lawsuit

You wont automatically lose your Social Security Disability Insurance upon receiving a settlement. In fact, up to 17% of all SSDI recipients have a connection to either workers compensation or public disability benefits. However, the amount you receive from SSDI could be lowered due to receiving a settlement or winning a lawsuit, in some cases significantly so.

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Fact #: Most Older Beneficiaries Rely On Social Security For The Majority Of Their Income

Social Security provides the majority of income to most older adults. For about half of this group, it provides at least 50 percent of their income, and for about 1 in 4 older adults, it provides at least 90 percent of their income, according to multiple surveys and the Census Bureau study.

Most retirees have modest incomes, save for some at the top of the income spectrum. Most low-income older Americans have very little pension income, if any, according to the U.S. Census Bureau study. Among retiree households in the bottom third of the income distribution, most received no pension income. About 1 in 4 of these households lived on less than $20,000 in 2015, and about half lived on $50,000 or less, according to an Social Security Administration study that also matches survey and administrative data.

A Few Other Situations:

• If you already receive benefits as a spouse, your benefit will automatically convert to survivors benefits after we receive the report of death.
• If you are also eligible for retirement benefits, but haven’t applied yet, you have an additional option. You can apply for retirement or survivors benefits now and switch to the other benefit later.
• For those already receiving retirement benefits, you can only apply for benefits as a widow or widower if the retirement benefit you receive is less than the benefits you would receive as a survivor.

If you became entitled to retirement benefits less than 12 months ago, you may be able towithdraw your retirement application and apply for survivors benefits only. If you do that, you can reapply for the retirement benefits later when they will be higher.

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What Is A Lump

A lump-sum payment is a one-time Social Security payment that you received for prior-year benefits. For example, when someone is granted disability benefits they’ll receive a lump sum to cover the entire time since they first applied for disability. This period could cover months or years.

The similar-sounding $255 lump-sum death benefit payment from Social Security is different. This is not a lump sum for tax purposes.

After you enter your SSA-1099 information, we’ll ask if you received a lump-sum Social Security payment. If you didn’t receive one, answer No and move on.

If you did, answer Yes and follow the instructions. Your SSA-1099 lump-sum section breaks down the payments into what amount was received for each preceding year. You can only enter one year at a time. If you need to enter benefits received for a different tax year, select Add another lump-sum payment.

While your lump sum may include benefit payments for more than one year, you do not have to file an amended tax return for any prior year. You might need to pay taxes on a small portion of your lump-sum payment. However, you might be able to avoid these taxes by apportioning prior year benefits to those previous years income .

After you enter your lump-sum Social Security payment information, TurboTax will automatically figure what, if any, taxes you owe due to the lump-sum payment.

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Should You Accept A Lump Sum Social Security Payout

There are some cases where you can receive a lump sum Social Security payout.

Overall, this may seem like a good deal. Having a lump sum means you can use that money right away instead of waiting for it to come in monthly installments.

But is a lump sum Social Security payout really a good idea? Read on to understand the pros and cons of this decision for yourself.

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Fact #: Social Security Provides A Foundation Of Retirement Protection For Nearly All People In The Us

97% of older adults either receive Social Security or will receive it.

Almost all workers participate in Social Security by making payroll tax contributions, and almost all older adults receive Social Security benefits. In fact, 97 percent of older adults either receive Social Security or will receive it, according to Social Security Administration estimates.

The near universality of Social Security brings many important advantages. It provides a foundation of retirement protection for people at all earnings levels. It encourages private pensions and personal saving because it isnt means-tested it doesnt reduce or deny benefits to people whose income or assets exceed a certain level. Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower.

Universal participation and the absence of means-testing make Social Security very efficient to administer. Administrative costs amount to only 0.6 percent of annual benefits, far below the percentages for private retirement annuities. Means-testing Social Security would impose significant reporting and processing burdens on both recipients and administrators, undercutting many of those advantages while yielding little savings.

When To Tell Us If You Get A Lump Sum

If you report fortnightly and get a lump sum, you need to tell us in the reporting period that you get it.

If you dont report fortnightly and get a lump sum, you need to tell us within 14 days of the earlier of these 2 dates:

• the date youre able to get the lump sum
• the date you actually get it.

You must tell us about any lump sum you get, even if you think its exempt from the income test. You also need to tell us about any changes to your assets.

If you dont tell us, we may overpay you. If this happens youll have to pay us back.

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How Can I Minimize The Offset Amount

There are some things you can do to minimize the offset amount of a lump-sum settlement or lawsuit payment:

• You can have the money paid as an annuity instead of all at once. Put simply, this means youll receive a set amount of money per year rather than the entire sum in one sitting. This option may work well for people who are close to retirement age and/or are not receiving the full 80% benefit from SSDI.
• You can have the settlement or lawsuit payment deferred so you start receiving an annuity at a future date instead of right now. This is ideal for anyone who receives 80% of his or her former salary from SSDI but still wants the full lump-sum payment from the lawsuit or settlement. By deferring payment until retirement age, a person can receive both SSDI and the full settlement/lawsuit payment.

These options have their flaws, and may not be suitable for everyone. Talk to a lawyer about your options to ensure your financial decisions meet your current and future financial needs.

Documents You May Need To Provide

We may ask you to provide documents to show that you are eligible, such as:

• A birth certificate or other proof of birth
• Proof of U.S. citizenship or lawful alien status if you were not born in the United States
• U.S. military discharge paper if you had military service before 1968
• W-2 forms and/or self-employment tax returns for last year and
• A death certificate for the deceased worker.

Important

We accept photocopies of W-2 forms or self-employment tax returns, but we must see the original of most other documents, such as your birth certificate. We will return the documents to you.

Do not delay applying for benefits because you do not have all the documents. We will help you get them.

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Social Security Lump Sum Benefit History

The lump sum benefit option isnt new and has been available when claiming retirement benefits at your full retirement age or later. This is usually between the ages of 66 and 70.

Social Security representatives are required to fully explain this choice to eligible applicants, whether they ask about it or not, and since it is offered last minute, a knee-jerk reaction can make the applicant decide to take the offernot fully realizing what they have done until hanging up the phone. The representative may even try and persuade the applicant to take the lump sum by saying things like, Most people take it.

Other Things You Need To Know

There are limits on how much survivors may earn while they receive benefits.

Benefits for a widow, widower, or surviving divorced spouse may be affected by several additional factors:

• If you remarry before age 60 , you cannot receive benefits as a surviving spouse while you are married.
• If you remarry after age 60 , you will continue to qualify for benefits on your deceased spouse’s Social Security record.

However, if your current spouse is a Social Security beneficiary, you may want to apply for spouse’s benefits on their record. If that amount is more than your widow’s or widower’s benefit, you will receive a combination of benefits that equals the higher amount.

• If you receive benefits as a widow, widower, or surviving divorced spouse, you can switch to your own retirement benefit as early as age 62. This assumes you are eligible for retirement benefits and your retirement rate is higher than your rate as a widow, widower, or surviving divorced spouse.
• In many cases, a widow or widower can begin receiving one benefit at a reduced rate and allow the other benefit amount to increase.
• If you will also receive a pension based on work not covered by Social Security, such as government or foreign work, your Social Security benefits as a survivor may be affected.

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What Is Social Security Disability Back Pay

Back pay is an unofficial but widely used term for what the Social Security Administration calls past-due benefits, payments to cover a period in which you were medically qualified for disability benefits but had not yet been approved to collect them.

Back pay is a common feature of disability claims largely because of how long they can take, particularly if an applicant is initially rejected and challenges the decision. If you win on appeal, a process that can take a year or more, Social Security will, in effect, make good on benefits you would have received had you been approved earlier.

These past-due payments can go back as far as the date of your original application if the SSA ultimately determines that you met its definition of disability being unable to do substantial paying work at the time you filed the claim.

How To Determine If You Should Take The Lump Sum Social Security Payout

First, its important to understand two key concepts:

As a result, its crucial to understand when youll attain full retirement age, as without knowing this information you wont be able to do the math to determine whether a lump sum is worthwhile.

Heres what to know:

First, your full retirement age is dependent on your year of birth. For anyone born in the years 1943 and 1954, the full retirement age is 66. If you were born between 1954 and 1960 you simply add two months for every year up to 1960 when the full retirement age is fixed at 67.

The amount of your benefit increases by two-thirds of 1% every month that you delay filing for benefits beyond your full retirement age. That works out to .667% per month.

The next crucial concept to grasp is that the Social Security Administration states that anyone who files for retirement benefits after full retirement age may receive up to six months benefits payable in a lump sumbut not for months that occurred before your full retirement age.

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