Son inherits unexpected taxes

Two years ago my nephew received a $20,000 Social Security disability benefit after his father passed away unexpectedly. The money was retroactive to when his father started the application. My nephew has just received a notice from the IRS that he owes $4,000 in taxes. He had been advised that this money was not taxable. How should he handle this?

Your nephew found out the hard way that in some cases that benefit is indeed taxable. Here is one of the key points related to your nephew’s situation from the IRS’ website:

“The amount of income tax that your child must pay on that part of the benefits that belongs to your child depends on the child’s total amount of income and benefits for the taxable year.”

Here are some specifics: “To find out whether any of the child’s benefits may be taxable, compare the base amount for the child’s filing status with the total of onehalf of the child’s benefits, plus all of the child’s other income, including tax-exempt interest; if the child is single, the base amount for the child’s filing status is $25,000.

“If the total of one half of the child’s Social Security benefits and all the child’s other income is greater than the base amount ... part of the child’s Social Security benefits may be taxable,” the IRS website says.

If your nephew is married and files a joint return, he and his spouse must combine their incomes and benefits, if his spouse receives any, to determine if the benefits are taxable.

Go to bit.ly/litaxes to download a worksheet to determine if your benefits are taxable.