In 2025 Clients who qualify will receive lump sum Social Security Payments from Prior Years

On January 9, 2025 – President Biden signed the Social Security Fairness Act into law, repealing the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). This allows retired law enforcement officers, along with other public servants to receive their full-earned Social Security benefits. The repeal of the WEP and GPO addresses long-standing inequities that reduced Social Security benefits for those with government pensions.

Those who qualified are starting to receive their back-benefits in 2025. So be aware of the options to compute taxation of these benefits.

In the first option, the Social Security lump-sum payments, which may include back benefits for prior years, are reported as income in the year received. This means that even if a portion of the payment relates to earlier tax years, you include the entire payment in your current year’s income for tax purposes when figuring the taxable part of the benefits received. This could result in higher taxable amounts for 2025.

However, the IRS does offer a method, known as the “lump-sum election,” that might help reduce the taxable portion and overall taxation of your benefits.

Lump-sum election

This method allows you to figure the taxable part of the lump-sum payment by treating it as if it were received in the prior year or years it was due. You would refigure the taxable portion of your Social Security benefits for those earlier years, using the income for each of those years, to determine if it lowers your current year tax liability. 

To utilize the lump-sum election method you would check the box on line 6c of your Form 1040 or 1040-SR. You compute the taxable portion of your total benefits for the earlier year using that year’s income, subtract any benefits already reported for that year, and the result is added to your current year’s taxable benefits (excluding the lump-sum amount for the prior year). 

• IRS Publication 915 contains worksheets and details on how to calculate the taxable part using this method.
• It is important to note you don’t amend prior year returns; the lump-sum election is applied when filing your current year return.
• It is recommended to consult a tax professional to determine the best method for your situation.