Dear Tax Talk,
I am managing conservator for my 13-year-old grandson, who has been receiving survivor benefits of approximately $430 a month from Social Security since his dad died in 2007. Following a claim for the disability due to my son prior to his death, my grandson received a lump sum of $5,300 in disability due to his dad, going back to September 2006 when his dad turned 50 in 2009.

My question is: How do I report this on my taxes for 2009? My son was disabled and lived with me for two years prior to his death, as did my grandson. Since the SSA-1099 is made out to my grandson, with me as custodial parent, do I figure the portion that applied for the years going back to 2006 as separate for each year, and then only figure what was paid for 2009 (approximately eight months) on my taxes for 2009?

Please also advise if there is a publication or something that explains this.
— Glorian

Dear Glorian,
Your question touches on a few tax issues, such as the extent to which benefits are taxable, who is the taxpayer and in what year is income taxable.

Depending on a taxpayer’s other income, up to 85 percent of Social Security benefits can be taxable. Generally, if one-half of your benefits plus your other income (including tax-exempt interest) exceed $25,000 if you are single or $32,000 if married, part of your benefits will be taxable. Although not yet updated for 2009, Publication 915 provides a work sheet for determining taxable Social Security benefits.

Benefits are included in the taxable income (to the extent they are taxable) of the person who has the legal right to receive the benefits. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you. One-half of the part that belongs to your child must be added to your child’s other income to see whether any of those benefits are taxable to your child.

When you receive a lump sum payment for benefits attributable to an earlier year(s), the amounts and years are shown on Form RRB-1099 in Box 9. The benefits are reportable on your current year return but by making an election can be reduced if a lower amount would have been taxable in the years to which they relate.

For example, assume your grandson has no other income for the years 2006 to 2009. In that case, none of the benefits would have been taxable in any year and he is not required to pay tax on the $5,300 received in 2009 or file a return.

Alternatively, assume your grandson received $50,000 in income in 2006 and the Social Security benefits for that year would have been $1,400, so that 85 percent would be taxable. Your grandson has no other income in 2009. If you do not elect to redetermine taxable benefits in earlier years, his benefits would not be taxable in 2009 and he would not be required to file a return.

Alternatively, assume your grandson has $50,000 in other taxable income in 2009 but none for 2006 to 2008 and $4,000 of the Social Security benefits relate to the earlier years. By electing to redetermine his taxable benefits in earlier years, he can exclude the $4,000 from being partly taxable in 2009, so that only the appropriate percentage (up to 85 percent) of $1,300 of the $5,300 would be includible in income in 2009.

See the work sheets and examples in Publication 915 under the heading Lump-Sum Election.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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