11.   Social Security and Equivalent Railroad Retirement Benefits

Table of Contents

    * Introduction
    * Useful Items - You may want to see:
    * Are Any of Your Benefits Taxable?
    * How To Report Your Benefits
          o How Much Is Taxable?
    * Examples
    * Deductions Related to Your Benefits
          o Repayments More Than Gross Benefits

Introduction

This chapter explains the federal income tax rules for social security
benefits and equivalent tier 1 railroad retirement benefits. It explains:

    *

      How to figure whether your benefits are taxable,
    *

      How to use the social security benefits worksheet (with examples),
    *

      How to report your taxable benefits, and
    *

      How to treat repayments that are more than the benefits you received
during the year.

Social security benefits include monthly survivor and disability benefits.
They do not include supplemental security income (SSI) payments, which are
not taxable.

Equivalent tier 1 railroad retirement benefits are the part of tier 1
benefits that a railroad employee or beneficiary would have been entitled
to receive under the social security system. They are commonly called the
social security equivalent benefit (SSEB) portion of tier 1 benefits.

If you received these benefits during 2005, you should have received a Form
SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by
the Railroad Retirement Board, (Form SSA-1042S, Social Security Benefit
Statement, or Form RRB-1042S Statement for Nonresident Alien Recipients of:
Payments by the Railroad Retirement Board, if you are a nonresident alien).
These forms show the amounts received and repaid, and taxes withheld for
the year. You may receive more than one of these forms for the same year.
You should add the amounts shown on all forms you receive for the year to
determine the “total” amounts received and repaid, and taxes withheld for
that year. See the Appendix at the end of Publication 915 for more information.
Note.

When the term “benefits” is used in this chapter, it applies to both social
security benefits and the SSEB portion of tier 1 railroad retirement benefits.
What is not covered in this chapter.   This chapter does not cover the tax
rules for the following railroad retirement benefits:

    *

      Non-social security equivalent benefit (NSSEB) portion of tier 1
benefits,
    *

      Tier 2 benefits,
    *

      Vested dual benefits, and
    *

      Supplemental annuity benefits.

For information on these benefits, see Publication 575, Pension and Annuity
Income.

  This chapter also does not cover the tax rules for foreign social
security benefits. These benefits are taxable as annuities, unless they are
exempt from U.S. tax or treated as a U.S. social security benefit under a
tax treaty.

Useful Items - You may want to see:

Publication

    *

      575 Pension and Annuity Income
    *

      590 Individual Retirement Arrangements (IRAs)
    *

      915 Social Security and Equivalent Railroad Retirement Benefits

Forms (and Instructions)

    *

      1040-ES
      Estimated Tax for Individuals
    *

      W-4V
      Voluntary Withholding Request

Are Any of Your Benefits Taxable?

To find out whether any of your benefits may be taxable, compare the base
amount for your filing status with the total of:

   1.

      One-half of your benefits, plus
   2.

      All your other income, including tax-exempt interest.

When making this comparison, do not reduce your other income by any
exclusions for:

    *

      Interest from qualified U.S. savings bonds,
    *

      Employer-provided adoption benefits,
    *

      Foreign earned income or foreign housing, or
    *

      Income earned by bona fide residents of American Samoa or Puerto Rico.

Figuring total income.   To figure the total of one-half of your benefits
plus your other income, use the worksheet later in this discussion. If the
total is more than your base amount, part of your benefits may be taxable.

   If you are married and file a joint return for 2005, you and your spouse
must combine your incomes and your benefits to figure whether any of your
combined benefits are taxable. Even if your spouse did not receive any
benefits, you must add your spouse's income to yours to figure whether any
of your benefits are taxable.

  
Tip
If the only income you received during 2005 was your social security or the
SSEB portion of tier 1 railroad retirement benefits, your benefits
generally are not taxable and you probably do not have to file a return. If
you have income in addition to your benefits, you may have to file a return
even if none of your benefits are taxable.

Base amount.   Your base amount is:

    *

      $25,000 if you are single, head of household, or qualifying widow(er),
    *

      $25,000 if you are married filing separately and lived apart from
your spouse for all of 2005,
    *

      $32,000 if you are married filing jointly, or
    *

      $-0- if you are married filing separately and lived with your spouse
at any time during 2005.

Worksheet you may need to fill in
Worksheet. You can use the following worksheet to figure the amount of
income to compare with your base amount. This is a quick way to check
whether some of your benefits may be taxable.

A. 	Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099.
Include the full amount of any lump-sum benefit payments received in 2005,
for 2005 and earlier years. (If you received more than one form, combine
the amounts from box 5 and enter the total.) 	A. 	 
Note. If the amount on line A is zero or less, stop here; none of your
benefits are taxable this year.
B. 	Enter one-half of the amount on line A 	B. 	 
C. 	Enter your taxable pensions, wages, interest, dividends, and other
taxable income 	C. 	 
D. 	Enter any tax-exempt interest income (such as interest on municipal
bonds) plus any exclusions from income (listed earlier). 	D. 	 
E. 	Add lines B, C, and D 	E. 	 
Note. Compare the amount on line E to your base amount for your filing
status. If the amount on line E equals or is less than the base amount for
your filing status, none of your benefits are taxable this year. If the
amount on line E is more than your base amount, some of your benefits may
be taxable. You need to complete Worksheet 1 in Publication 915 (or the
Social Security Benefits Worksheet in your tax form instruction booklet).

Example.

You and your spouse (both over 65) are filing a joint return for 2005, and
you both received social security benefits during the year. In January
2006, you received a Form SSA-1099 showing net benefits of $7,500 in box 5.
Your spouse received a Form SSA-1099 showing net benefits of $3,500 in box
5. You also received a taxable pension of $19,000 and interest income of
$500. You did not have any tax-exempt interest income. Your benefits are
not taxable for 2005 because your income, as figured in the following
worksheet, is not more than your base amount ($32,000) for married filing
jointly.

Even though none of your benefits are taxable, you must file a return for
2005 because your taxable gross income ($19,500) exceeds the minimum filing
requirement amount for your filing status.

A. 	Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099.
Include the full amount of any lump-sum benefit payments received in 2005,
for 2005 and earlier years. (If you received more than one form, combine
the amounts from box 5 and enter the total.) 	A. 	$ 11,000
Note. If the amount on line A is zero or less, stop here; none of your
benefits are taxable this year.
B. 	Enter one-half of the amount on line A 	B. 	5,500
C. 	Enter your taxable pensions, wages, interest, dividends, and other
taxable income 	C. 	19,500
D. 	Enter any tax-exempt interest income (such as interest on municipal
bonds) plus any exclusions from income (listed earlier). 	D. 	-0-
E. 	Add lines B, C, and D 	E. 	$25,000
Note. Compare the amount on line E to your base amount for your filing
status. If the amount on line E equals or is less than the base amount for
your filing status, none of your benefits are taxable this year. If the
amount on line E is more than your base amount, some of your benefits may
be taxable. You then need to complete Worksheet 1 in Publication 915 (or
the Social Security Benefits Worksheet in your tax form instruction booklet).

Who is taxed.   The person who has the legal right to receive the benefits
must determine whether the benefits are taxable. 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.

Repayment of benefits.   Any repayment of benefits you made during 2005
must be subtracted from the gross benefits you received in 2005. It does
not matter whether the repayment was for a benefit you received in 2005 or
in an earlier year. If you repaid more than the gross benefits you received
in 2005, see Repayments More Than Gross Benefits, later.

  Your gross benefits are shown in box 3 of Form SSA-1099 or RRB-1099. Your
repayments are shown in box 4. The amount in box 5 shows your net benefits
for 2005 (box 3 minus box 4). Use the amount in box 5 to figure whether any
of your benefits are taxable.

Tax withholding and estimated tax.   You can choose to have federal income
tax withheld from your social security benefits and/or the SSEB portion of
your tier 1 railroad retirement benefits. If you choose to do this, you
must complete a Form W-4V. You can choose withholding at 7%, 10%, 15%, or
25% of your total benefit payment.

  If you do not choose to have income tax withheld, you may have to request
additional withholding from other income or pay estimated tax during the
year. For details, get Publication 505, Tax Withholding and Estimated Tax,
or the instructions for Form 1040-ES.

How To Report Your Benefits

If part of your benefits are taxable, you must use Form 1040 or Form 1040A.
You cannot use Form 1040EZ.
Reporting on Form 1040.   Report your net benefits (the amount in box 5 of
your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable part on
line 20b. If you are married filing separately and you lived apart from
your spouse for all of 2005, also enter “D” to the right of the word
“benefits” on line 20a.

Reporting on Form 1040A.   Report your net benefits (the amount in box 5 of
your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable part on
line 14b. If you are married filing separately and you lived apart from
your spouse for all of 2005, also enter “D” to the right of the word
“benefits” on line 14a.

Benefits not taxable.   If none of your benefits are taxable, do not report
any of them on your tax return. But if you are married filing separately
and you lived apart from your spouse for all of 2005, make the following
entries. On Form 1040, enter “D” to the right of the word “benefits” on
line 20a and “-0-” on line 20b. On Form 1040A, enter “D” to the right of
the word “benefits” on line 14a and “-0-” on line 14b.

How Much Is Taxable?

If part of your benefits are taxable, how much is taxable depends on the
total amount of your benefits and other income. Generally, the higher that
total amount, the greater the taxable part of your benefits.
Maximum taxable part.   Generally, up to 50% of your benefits will be
taxable. However, up to 85% of your benefits can be taxable if either of
the following situations applies to you.

    *

      The total of one-half of your benefits and all your other income is
more than $34,000 ($44,000 if you are married filing jointly).
    *

      You are married filing separately and lived with your spouse at any
time during 2005.

Which worksheet to use.   A worksheet to figure your taxable benefits is in
the instructions for your Form 1040 or Form 1040A. You can use either that
worksheet or Worksheet 1 in Publication 915, unless any of the following
situations applies to you.

   1.

      You contributed to a traditional individual retirement arrangement
(IRA) and you or your spouse is covered by a retirement plan at work. In
this situation, you must use the special worksheets in Appendix B of
Publication 590 to figure both your IRA deduction and your taxable benefits.
   2.

      Situation (1) does not apply and you take an exclusion for interest
from qualified U.S. savings bonds (Form 8815), for adoption benefits (Form
8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or
for income earned in American Samoa (Form 4563) or Puerto Rico by bona fide
residents. In this situation, you must use Worksheet 1 in Publication 915
to figure your taxable benefits.
   3.

      You received a lump-sum payment for an earlier year. In this
situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication
915. See Lump-sum election.

Lump-sum election.   You must include the taxable part of a lump-sum
(retroactive) payment of benefits received in 2005 in your 2005 income,
even if the payment includes benefits for an earlier year.

  
Tip
This type of lump-sum benefit payment should not be confused with the
lump-sum death benefit that both the SSA and RRB pay to many of their
beneficiaries. No part of the lump-sum death benefit is subject to tax.

  Generally, you use your 2005 income to figure the taxable part of the
total benefits received in 2005. However, you may be able to figure the
taxable part of a lump-sum payment for an earlier year separately, using
your income for the earlier year. You can elect this method if it lowers
your taxable benefits.

Making the election.   If you received a lump-sum benefit payment in 2005
that includes benefits for one or more earlier years, follow the
instructions in Publication 915 under Lump-Sum Election to see whether
making the election will lower your taxable benefits. That discussion also
explains how to make the election.

  
Caution
Because the earlier year's taxable benefits are included in your 2005
income, no adjustment is made to the earlier year's return. Do not file an
amended return for the earlier year.

Examples

The following are a few examples you can use as a guide to figure the
taxable part of your benefits.

Example 1.

George White is single and files Form 1040 for 2005. He received the
following income in 2005:
Fully taxable pension 	$18,600
Wages from part-time job 	9,400
Taxable interest income 	990
Total 	$28,990

George also received social security benefits during 2005. The Form
SSA-1099 he received in January 2006 shows $5,980 in box 5. To figure his
taxable benefits, George completes the worksheet shown here.
1. 	Enter the total amount from box 5 of ALL your Forms SSA-1099 and
RRB-1099 	$5,980
Note. If line 1 is zero or less, stop here; none of your benefits are
taxable. Otherwise, go to line 2. 	 
2. 	Enter one-half of line 1 	2,990
3. 	Enter the total of the amounts from: 	 
  	Form 1040: Lines 7, 8a, 8b, 9a, 10 through 14, 15b, 16b, 17 through 19,
and 21. 	 
  	Form 1040A: Lines 7, 8a, 8b, 9a, 10, 11b, 12b, and 13 	28,990
4. 	Form 1040 filers: Enter the total of any exclusions/adjustments for: 	 
  	• Qualified U.S. savings bond
interest (Form 8815, line 14), 	 
  	• Adoption benefits (Form 8839, line
30), 	 
  	• Foreign earned income or housing
(Form 2555, lines 43 and 48, or
Form 2555-EZ, line 18), and 	 
  	• Certain income of bona fide
residents of American
Samoa (Form 4563, line 15)
or Puerto Rico 	 
  	Form 1040A filers: Enter the total of any exclusions for qualified U.S.
savings bond interest ( Form 8815, line 14) or for adoption benefits ( Form
8839, line 30). 	-0-
5. 	Add lines 2, 3, and 4 	31,980
6. 	Form 1040 filers: Enter the amount from Form 1040, line 36, minus any
amounts on Form 1040, lines 33, 34, and 35 	 
  	Form 1040A filers: Enter the amount from Form 1040A, line 20, minus any
amounts on Form 1040A, lines 18 and 19. 	-0-
7. 	Is the amount on line 6 less than the amount on line 5? 	 
  	No.
Stop
None of your social security benefits are taxable.
  	Yes.Subtract line 6 from line 5 	31,980
8. 	If you are:

    *

      Married filing jointly, enter $32,000
    *

      Single, head of household, qualifying widow(er), or married filing
separately and you lived apart from your spouse for all of 2005, enter $25,000.

	25,000
  	Note. If you are married filing separately and you lived with your
spouse at any time in 2005, skip lines 8 through 15; multiply line 7 by 85%
(.85) and enter the result on line 16. Then go to line 17. 	 
9. 	Is the amount on line 8 less than the amount on line 7? 	 
	  	 
  	No.
Stop
None of your benefits are taxable. Do not enter any amounts on Form 1040,
line 20a or 20b, or on Form 1040A, line 14a or 14b. But if you are married
filing separately and you lived apart from your spouse for all of 2005,
enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. 	 
  	Yes.Subtract line 8 from line 7 	6,980
10. 	Enter $12,000 if married filing jointly; $9,000 if single, head of
household, qualifying widow(er), or married filing separately and you lived
apart from your spouse for all of 2005 	9,000
11. 	Subtract line 10 from line 9. If zero or less, enter -0- 	-0-
12. 	Enter the smaller of line 9 or line 10 	6,980
  	  	 
13. 	Enter one-half of line 12 	3,490
14. 	Enter the smaller of line 2 or line 13 	2,990
15. 	Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- 	-0-
16. 	Add lines 14 and 15 	2,990
17. 	Multiply line 1 by 85% (.85) 	5,083
18. 	Taxable benefits. Enter the smaller of line 16 or line 17 	$2,990
  	• Enter the amount from line 1 above
on Form 1040, line 20a or on
Form 1040A, line 14a. 	 
  	• Enter the amount from line 18 above
on Form 1040, line 20b or on
Form 1040A, line 14b. 	 

The amount on line 18 of George's worksheet shows that $2,990 of his social
security benefits is taxable. On line 20a of his Form 1040, George enters
his net benefits of $5,980. On line 20b, he enters his taxable benefits of
$2,990.

Example 2.

Ray and Alice Hopkins file a joint return on Form 1040A for 2005. Ray is
retired and received a fully taxable pension of $15,500. He also received
social security benefits, and his Form SSA-1099 for 2004 shows net benefits
of $5,600 in box 5. Alice worked during the year and had wages of $14,000.
She made a deductible payment to her IRA account of $1,000. Ray and Alice
have two savings accounts with a total of $250 in interest income. They
complete Worksheet 1 and find that none of Ray's social security benefits
are taxable. They leave lines 14a and 14b of their Form 1040A blank.
1. 	Enter the total amount from box 5 of ALL your Forms SSA-1099 and
RRB-1099 	$5,600
Note. If line 1 is zero or less, stop here; none of your benefits are
taxable. Otherwise, go to line 2. 	 
2. 	Enter one-half of line 1 	2,800
3. 	Enter the total of the amounts from: 	 
  	Form 1040: Lines 7, 8a, 8b, 9a, 10 through 14, 15b, 16b, 17 through 19,
and 21. 	 
  	Form 1040A: Lines 7, 8a, 8b, 9a, 10, 11b, 12b, and 13 	29,750
4. 	Form 1040 filers: Enter the total of any exclusions/adjustments for: 	 
  	• Qualified U.S. savings bond
interest (Form 8815, line 14), 	 
  	• Adoption benefits (Form 8839, line
30), 	 
  	• Foreign earned income or housing
(Form 2555, lines 43 and 48, or
Form 2555-EZ, line 18), and 	 
  	• Certain income of bona fide
residents of American
Samoa (Form 4563, line 15)
or Puerto Rico 	 
  	Form 1040A filers: Enter the total of any exclusion for qualified U.S.
savings bond interest (Form 8815, line 14) or for adoption benefits ( Form
8839, line 30). 	-0-
5. 	Add lines 2, 3, and 4 	32,550
6. 	Form 1040 filers: Enter the amount from Form 1040, line 36, minus any
amounts on Form 1040, lines 33, 34, and 35 	 
  	Form 1040A filers: Enter the amount from Form 1040A, line 20, minus any
amounts on Form 1040A, lines 18 and 19. 	1,000
7. 	Is the amount on line 6 less than the amount on line 5? 	 
  	No.
Stop
None of your benefits are taxable.
  	Yes.Subtract line 6 from line 5 	31,550
8. 	If you are:

    *

      Married filing jointly, enter $32,000
    *

      Single, head of household, qualifying widow(er), or married filing
separately and you lived apart from your spouse for all of 2005, enter $25,000.

	32,000
  	Note. If you are married filing separately and you lived with your
spouse at any time in 2005, skip lines 8 through 15; multiply line 7 by 85%
(.85) and enter the result on line 16. Then go to line 17. 	 
9. 	Is the amount on line 8 less than the amount on line 7? 	 
  	No.
Stop
None of your benefits are taxable. Do not enter any amounts on Form 1040,
line 20a or 20b, or on Form 1040A, line 14a or 14b. But if you are married
filing separately and you lived apart from your spouse for all of 2005,
enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. 	 
  	Yes.Subtract line 8 from line 7 	 
10. 	Enter $12,000 if married filing jointly; $9,000 if single, head of
household, qualifying widow(er), or married filing separately and you lived
apart from your spouse for all of 2005 	 
11. 	Subtract line 10 from line 9. If zero or less, enter -0- 	 
12. 	Enter the smaller of line 9 or line 10 	 
13. 	Enter one-half of line 12 	 
14. 	Enter the smaller of line 2 or line 13 	 
15. 	Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- 	 
16. 	Add lines 14 and 15 	 
17. 	Multiply line 1 by 85% (.85) 	 
18. 	Taxable benefits. Enter the smaller of line 16 or line 17 	 
  	• Enter the amount from line 1 above
on Form 1040, line 20a or on
Form 1040A, line 14a. 	 
  	• Enter the amount from line 18 above
on Form 1040, line 20b or on
Form 1040A, line 14b. 	 

Example 3.

Joe and Betty Johnson file a joint return on Form 1040 for 2005. Joe is a
retired railroad worker and in 2005 received the social security equivalent
benefit (SSEB) portion of tier 1 railroad retirement benefits. Joe's Form
RRB-1099 shows $10,000 in box 5. Betty is a retired government worker and
receives a fully taxable pension of $38,000. They had $2,300 in interest
income plus interest of $200 on a qualified U.S. savings bond. The savings
bond interest qualified for the exclusion. Thus, they have a total income
of $40,300 ($38,000 + $2,300). They figure their taxable benefits by
completing Worksheet 1.
1. 	Enter the total amount from box 5 of ALL your Forms SSA-1099 and
RRB-1099 	$10,000
Note. If line 1 is zero or less, stop here; none of your benefits are
taxable. Otherwise, go to line 2. 	 
2. 	Enter one-half of line 1 	5,000
3. 	Enter the total of the amounts from: 	 
  	Form 1040: Lines 7, 8a, 8b, 9a, 10 through 14, 15b, 16b, 17 through 19,
and 21. 	 
  	Form 1040A: Lines 7, 8a, 8b, 9a, 10, 11b, 12b, and 13 	40,300
4. 	Form 1040 filers: Enter the total of any exclusions/adjustments for: 	 
  	• Qualified U.S. savings bond
interest (Form 8815, line 14), 	 
  	• Adoption benefits (Form 8839, line
30), 	 
  	• Foreign earned income or housing
(Form 2555, lines 43 and 48, or
Form 2555-EZ, line 18), and 	 
  	• Certain income of bona fide
residents of American
Samoa (Form 4563, line 15)
or Puerto Rico 	 
  	Form 1040A filers: Enter the total of any exclusions for qualified U.S.
savings bond interest (Form 8815, line 14) or for adoption benefits (Form
8839, line 30). 	200
5. 	Add lines 2, 3, and 4 	45,500
6. 	Form 1040 filers: Enter the amount from Form 1040, line 36, minus any
amounts on Form 1040, lines 33, 34, and 35 	 
  	Form 1040A filers: Enter the amount from Form 1040A, line 20, minus any
amounts on Form 1040A, lines 18 and 19. 	-0-
7. 	Is the amount on line 6 less than the amount on line 5? 	 
  	No.
Stop
None of your benefits are taxable.
  	Yes.Subtract line 6 from line 5 	45,500
8. 	. If you are:

    *

      Married filing jointly, enter $32,000
    *

      Single, head of household, qualifying widow(er), or married filing
separately and you lived apart from your spouse for all of 2005, enter $25,000

	32,000
  	Note. If you are married filing separately and you lived with your
spouse at any time in 2005, skip lines 8 through 15; multiply line 7 by 85%
(.85) and enter the result on line 16. Then go to line 17 	 
9. 	Is the amount on line 8 less than the amount on line 7? 	 
  	No.
Stop
None of your benefits are taxable. Do not enter any amounts on Form 1040,
line 20a or 20b, or on Form 1040A, line 14a or 14b. But if you are married
filing separately and you lived apart from your spouse for all of 2005,
enter -0- on Form 1040, line 20b, or on Form 1040A, line 14b. 	 
  	Yes.Subtract line 8 from line 7 	13,500
10. 	Enter $12,000 if married filing jointly; $9,000 if single, head of
household, qualifying widow(er), or married filing separately and you lived
apart from your spouse for all of 2005 	12,000
11. 	Subtract line 10 from line 9. If zero or less, enter -0- 	1,500
12. 	Enter the smaller of line 9 or line 10 	12,000
13. 	Enter one-half of line 12 	6,000
14. 	Enter the smaller of line 2 or line 13 	5,000
15. 	Multiply line 11 by 85% (.85). If line 11 is zero, enter -0- 	1,275
16. 	Add lines 14 and 15 	6,275
17. 	Multiply line 1 by 85% (.85) 	8,500
18. 	Taxable benefits. Enter the smaller of line 16 or line 17 	$6,275
  	• Enter the amount from line 1 above
on Form 1040, line 20a or on
Form 1040A, line 14a. 	 
  	• Enter the amount from line 18 above
on Form 1040, line 20b or on
Form 1040A, line 14b. 	 

More than 50% of Joe's net benefits are taxable because the income on line
7 of the worksheet ($45,500) is more than $44,000. Joe and Betty enter
$10,000 on Form 1040, line 20a, and $6,275 on Form 1040, line 20b.
Deductions Related to Your Benefits

You may be entitled to deduct certain amounts related to the benefits you
receive.
Disability payments.   You may have received disability payments from your
employer or an insurance company that you included as income on your tax
return in an earlier year. If you received a lump-sum payment from SSA or
RRB, and you had to repay the employer or insurance company for the
disability payments, you can take an itemized deduction for the part of the
payments you included in gross income in the earlier year. If the amount
you repay is more than $3,000, you may be able to claim a tax credit
instead. Claim the deduction or credit in the same way explained under
Repayments More Than Gross Benefits, later.

Legal expenses.   You can usually deduct legal expenses that you pay or
incur to produce or collect taxable income or in connection with the
determination, collection, or refund of any tax.

  Legal expenses for collecting the taxable part of your benefits are
deductible as a miscellaneous itemized deduction on Schedule A (Form 1040),
line 22.

Repayments More Than Gross Benefits

In some situations, your Form SSA-1099 or Form RRB-1099 will show that the
total benefits you repaid (box 4) are more than the gross benefits (box 3)
you received. If this occurred, your net benefits in box 5 will be a
negative figure (a figure in parentheses) and none of your benefits will be
taxable. If you receive more than one form, a negative figure in box 5 of
one form is used to offset a positive figure in box 5 of another form for
that same year.

If you have any questions about this negative figure, contact your local
SSA office or your local RRB field office.
Joint return.   If you and your spouse file a joint return, and your Form
SSA-1099 or RRB-1099 has a negative figure in box 5, but your spouse's does
not, subtract the amount in box 5 of your form from the amount in box 5 of
your spouse's form. You do this to get your net benefits when figuring if
your combined benefits are taxable.

Example.

John and Mary file a joint return for 2005. John received Form SSA-1099
showing $3,000 in box 5. Mary also received Form SSA-1099 and the amount in
box 5 was ($500). John and Mary will use $2,500 ($3,000 minus $500) as the
amount of their net benefits when figuring if any of their combined
benefits are taxable.
Repayment of benefits received in an earlier year.   If the total amount
shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative
figure, you can take an itemized deduction for the part of this negative
figure that represents benefits you included in gross income in an earlier
year.

Deduction $3,000 or less.   If this deduction is $3,000 or less, it is
subject to the 2%-of-adjusted-gross-income limit that applies to certain
miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 22.

Deduction more than $3,000.    If this deduction is more than $3,000, you
should figure your tax two ways:

   1.

      Figure your tax for 2005 with the itemized deduction included on
Schedule A line 27.
   2.

      Figure your tax for 2005 in the following steps.
         1.

            Figure the tax without the itemized deduction included on
Schedule A line 27.
         2.

            For each year after 1983 for which part of the negative figure
represents a repayment of benefits, refigure your taxable benefits as if
your total benefits for the year were reduced by that part of the negative
figure. Then refigure the tax for that year.
         3.

            Subtract the total of the refigured tax amounts in (b) from the
total of your actual tax amounts.
         4.

            Subtract the result in (c) from the result in (a).

Compare the tax figured in methods (1) and (2). Your tax for 2005 is the
smaller of the two amounts. If method (1) results in less tax, take the
itemized deduction on line 27, Schedule A (Form 1040). If method (2)
results in less tax, claim a credit for the amount from step 2(c) above on
Form 1040, line 70, and enter “I.R.C. 1341” in the margin to the left of
line 70. If both methods produce the same tax, deduct the repayment on
Schedule A (Form 1040), line 27.