I’m trying to determine how to best use a $35k SSDI lump sum payment. I am retired age 62 and my husband is 66 works part time. While we file taxes jointly, we elect to use our individual income independently. We do have a mortgage (but good equity) and about $6k in credit card debt. We have very little retirement savings except SS, my retired teaching pension, and his small IRA under $10k. Our combined income excluding SS is about $65k. I don’t know how to keep the lump sum to from being taxed as income, or how best to use it. Considering a third to a roth, a third to make house improvement to get a better value, and a third for personal events: travel, help married kids, medical, hearing aids. Just not sure if this is wise.
SAVAGE SAYS: Ok, you have two issues here — and both are important!? They are taxes on the money, and then uses of the money.
First, is how to handle the taxes on this lump sum payment. It took a lot of research on the internet,?and I am going to cut and paste below?the best answer I found. However, I suggest that you use a tax preparer who is familiar with the rules described here:
According to Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center, people receiving the one-time, lump-sum back payments are often confused by how it should be handled on their Income Tax Return. Gada said, “The average monthly SSDI benefit for 2011 was $1,072.96 or $12,875.54 for the year. As a result, many people relying on SSDI will not owe taxes. A problem can occur, however, if they mistakenly report all of a lump-sum payment received in 2011 as 2011 income, in which case they could end up paying too much in taxes.”
Gada continued, “Up to 50% of Social Security Disability benefits are taxable each year. The actual amount is determined by adding one-half of the taxpayer