If you receive a lump-sum payment of Social Security benefits reflecting amounts attributable to prior years, you can elect to use income from the prior years to figure the taxable portion of benefits attributable to those years. Under this lump-sum election, you refigure the taxable part of all your benefits for the earlier year (including the allocable part of the lump-sum payment) using that year’s income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for the current year (including the part of the lump-sum payment allocable to the current year). In effect, the lump-sum method determines how much of Social Security benefits are included in current income when some of the benefits relate to a prior year or years. But how does the use of the lump-sum election impact household income for purposes of the premium tax credit?
Recently there was a case in which a taxpayer received $26,180 of Social Security benefits in 2014, of which $11,902 was attributable to 2013. He elected to use the lump-sum method to report his benefits. He also enrolled in a health plan on the government Marketplace and in 2014 received advance payments of the premium tax credit totaling $4,460. He didn’t file Form 8962 to reconcile the advance payments with his income for the year.
The Tax Court had to decide whether household income (which is based on modified adjusted gross income) for premium tax credit purposes includes all of the Social Security payments received in the current year or only amounts attributable to the current year. The court said that all of the benefits received in the current year must be taken into account in determining income for purposes of the premium tax credit despite a lump-sum election for reporting Social Security benefits (Levon Johnson, 152 TC No. 6 (2019)). The court said that “the year of receipt, as opposed to the year in which Social Security benefits are attributable, is the significant definitive factor.
Note: A lump-sum payment on account of the death of a spouse, which is fixed at $255, is entirely tax free.