NOL and Taxable Social Security

[GolfCPA22]

Taxpayer receives social security benefits and has a farming loss for 2023 as well as a 2022 farming loss carryforward. My challenge is that Lacerte calculates taxable income before the NOL to be minimal with no taxable SS, however, when I enter the override to limit to 80%, then part of the social security becomes taxable and it becomes a vicious cycle that doesn't end with the same number twice.

Any guidance on how to calculate the NOL limitation when taxable social security has not been hit the limit of 50% or 85%?

[George4Tacks]

Generally bad things happen in Lacerte when you enter an override. What did you override. You use the phrase "taxable income" for net of farm loss and Social Security. Must be a lot of SS income. 

Get rid of the override and look at the worksheets Lacerte creates. My guess is Lacerte is doing it correctly.  

P.S. This is not support. This a forum supported by other users. You can call Lacerte and they can maybe help you figure this out. OR come back here with more information. We can not see your work.

[GolfCPA22]

I agree bad things happen with overrides, however, the NOL is from 2022 so it's limited to 80%, therefore, I am required to enter an override because Lacerte does not calculate the limitation. 

It's been hit and miss with the phone support, so I thought I'd reach out to the community first to see if some other professional has encountered a similar issue.

[BobKamman]

@George4Tacks "Must be a lot of SS income" -- or, more likely, there are Schedule B and W-2 income.  This is high school algebra, the formula is the same as what programs compute when there is an IRA deduction along with SS income.  Most of us have replaced high school algebra with more pleasant memories, so it is either "trial and error," or do a Google search for a formula that no doubt someone has already discovered.  

If the NOL carryover is $10k, why not just input $8K in the first place and find out how much SS is taxable with that amount?  Then figure out what, if anything, needs to be overridden from there.  

[DWayneB]

I have the same issue.  As much as we pay for Lacerte, you would think the system would perform the calculation.

[gs4]

The problem is when there is less than the maximum 85% taxable social security, then it does become circular.  I did just trial and error it to get it to the 80% NOL deduction which corresponds to the taxable amount of social security.  It took me 7-8 iterations, but if I were thinking more, probably 5-6 times would get it.  (Btw, Drake Software does the calculation.)

[SDennard]

I'm curious what you decided to do. I have the same issue. The taxable social security changes when I enter the amount of NOL that was calculated with "taxable income without regard to the NOL".

I decided to enter "O" NOL and let Lacerte calculate the taxable income (which calculated the taxable social security without the NOL deduction which would be the "taxable income without the NOL"). Then I manually calculated the 80% limit of NOL using that taxable income and entered it into the data. Then let it recalculate the return, which recalculated the taxable social security.  I couldn't find any IRS insight into this situation with SS and NOL in same return for clarification. I hope this is what was intended.

[Kappy]

@SDennard I do it the same way that you do it.

[GolfCPA22]

That's exactly what I did too! And since the 80% limitation isn't going away with the TCJA sunsets, I hope this is a priority on Lacerte's list to figure out.

[Kappy]

Lacerte seems to be leaving more and more calculations up to us each year.

You would think that such an expensive software package would be able to handle the necessary tax computations.

After the 2017 tax cuts, I called my Lacerte Rep and balked at the huge increase in the annual costs.

His response was "you have the Cadillac of tax software, and we needed to raise the fees in order to cover the research required for properly implementing the constantly changing tax laws."

[DEM]

George Tacks must not prepare individual tax returns for clients who receive social security and who have net operating loss carryovers.  Lacerte should do a better job.

[SCrawford]

I'm having the same issue.  This is so frustrating and I've wasted so much time.  I manually calculated the Modified Taxable Income and took 80% of it.  The 80% Modified Taxable income absorbed all of the first year NOL and a part of the second.  When I try to override in Screen 15 to show all of the 1st year being used, it is limiting it to 100% of the Modified Taxable Income calculated by the system, which does not include the modifications for net capital loss and taxable SS benefit modifications.

Where and or how did you enter "0" NOL. I have 4 NOL years that are carrying forward to 2023.

Thank you!

[abctax55]

@SCrawford 

In Lacerte...

-1 ='s  zero

Try that; see if it helps

[abctax55]

@DEM 

Don't pick on George or his skill set... OK?

Check out how many people he has helped over the years.

[JUTaxes]

I know your comment is back in 2024 -- but I was hoping you'd remember.

Can you explain what you did to get the 80% NOL deduction to correspond to the taxable amount of Social Security?  I've spent several hours trying to work this out, but not having any luck.

Thanks

[George4Tacks]

FYI - George has a MS in Mathematics Education. George knows how to do simultaneous equations. George know you ain't gonna get an exact answer in this iterative calculation that involves both of your key numbers changing as you try to work it out. IRS knows you ain't gonna get an exact answer in this iterative calculation that involves both of your key numbers changing as you try to work it out. Get close and plug that number in.

I got this using AI with Google, maybe it will help:

Setting up the simultaneous equations 

The following equations can be used to solve this issue. For a single filer, the taxable portion of Social Security benefits is determined by a series of thresholds. For this example, we will focus on the maximum 85% inclusion amount. 

Variables: 

• AGIprecap A cap G cap I sub p r e end-sub

  𝐴𝐺𝐼𝑝𝑟𝑒
  : AGI before the NOL deduction.
• SStotalcap S cap S sub t o t a l end-sub

  𝑆𝑆𝑡𝑜𝑡𝑎𝑙
  : The total Social Security benefits received (from Form SSA-1099, Box 5).
• SStaxablecap S cap S sub t a x a b l e end-sub

  𝑆𝑆𝑡𝑎𝑥𝑎𝑏𝑙𝑒
  : The taxable portion of Social Security benefits.
• AGIcap A cap G cap I

  𝐴𝐺𝐼
  : The final AGI after all adjustments.
• NOLfullcap N cap O cap L sub f u l l end-sub

  𝑁𝑂𝐿𝑓𝑢𝑙𝑙
  : The full NOL carryforward amount.
• NOLdeductcap N cap O cap L sub d e d u c t end-sub

  𝑁𝑂𝐿𝑑𝑒𝑑𝑢𝑐𝑡
  : The NOL deduction for the current year. 

Equation 1: Calculating the maximum NOL deduction
The maximum NOL deduction allowed is 80% of your taxable income without the NOL deduction. For a simple case (assuming the standard deduction), this can be expressed as:

NOLdeduct=0.80×(AGIpre+SStaxable−Standard Deduction)cap N cap O cap L sub d e d u c t end-sub equals 0.80 cross open paren cap A cap G cap I sub p r e end-sub plus cap S cap S sub t a x a b l e end-sub minus Standard Deduction close paren

𝑁𝑂𝐿𝑑𝑒𝑑𝑢𝑐𝑡=0.80×(𝐴𝐺𝐼𝑝𝑟𝑒+𝑆𝑆𝑡𝑎𝑥𝑎𝑏𝑙𝑒−Standard Deduction)

Equation 2: Calculating taxable Social Security benefits (85% rule)
The taxable portion of Social Security benefits is the lesser of two amounts, but the primary factor is your combined income (AGI + nontaxable interest + 50% of benefits). For combined income over the top threshold ($34,000 for single,

44,000formarriedfilingjointly),thetaxableamountistypically8544 comma 000 f o r m a r r i e d f i l i n g j o i n t l y close paren comma t h e t a x a b l e a m o u n t i s t y p i c a l l y 85

44,000𝑓𝑜𝑟𝑚𝑎𝑟𝑟𝑖𝑒𝑑𝑓𝑖𝑙𝑖𝑛𝑔𝑗𝑜𝑖𝑛𝑡𝑙𝑦),𝑡ℎ𝑒𝑡𝑎𝑥𝑎𝑏𝑙𝑒𝑎𝑚𝑜𝑢𝑛𝑡𝑖𝑠𝑡𝑦𝑝𝑖𝑐𝑎𝑙𝑙𝑦85

SStaxable=0.85×SStotalcap S cap S sub t a x a b l e end-sub equals 0.85 cross cap S cap S sub t o t a l end-sub

𝑆𝑆𝑡𝑎𝑥𝑎𝑏𝑙𝑒=0.85×𝑆𝑆𝑡𝑜𝑡𝑎𝑙

However,thisisonlytrueifyourincomeishighenough.Amorepreciseequation(ignoringnon−taxableinterestforsimplicity)is∶cap H o w e v e r comma t h i s i s o n l y t r u e i f y o u r i n c o m e i s h i g h e n o u g h point cap A m o r e p r e c i s e e q u a t i o n open paren i g n o r i n g n o n minus t a x a b l e i n t e r e s t f o r s i m p l i c i t y close paren i s colon

𝐻𝑜𝑤𝑒𝑣𝑒𝑟,𝑡ℎ𝑖𝑠𝑖𝑠𝑜𝑛𝑙𝑦𝑡𝑟𝑢𝑒𝑖𝑓𝑦𝑜𝑢𝑟𝑖𝑛𝑐𝑜𝑚𝑒𝑖𝑠ℎ𝑖𝑔ℎ𝑒𝑛𝑜𝑢𝑔ℎ.𝐴𝑚𝑜𝑟𝑒𝑝𝑟𝑒𝑐𝑖𝑠𝑒𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛(𝑖𝑔𝑛𝑜𝑟𝑖𝑛𝑔𝑛𝑜𝑛−𝑡𝑎𝑥𝑎𝑏𝑙𝑒𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑓𝑜𝑟𝑠𝑖𝑚𝑝𝑙𝑖𝑐𝑖𝑡𝑦)𝑖𝑠∶

AGI+0.5×SStotal=Combined Incomecap A cap G cap I plus 0.5 cross cap S cap S sub t o t a l end-sub equals Combined Income

𝐴𝐺𝐼+0.5×𝑆𝑆𝑡𝑜𝑡𝑎𝑙=Combined Income

$
The taxable benefit formula is based on this combined income and is not a simple linear equation. Because of this, it can be simpler to use an iterative process or to follow the IRS worksheets carefully. 

Using an iterative method (trial-and-error) 

Since the formulas are not perfectly linear, many tax professionals use an iterative or trial-and-error method to arrive at the correct figures. 

1. Step 1: Initial Calculation (Ignore NOL)
   • Complete the Form 1040 up to the AGI line, but do not include the NOL deduction yet.
   • Calculate the taxable Social Security benefits using the standard IRS worksheets (found in Publication 915). This will give you a preliminary taxable Social Security number.
   • Determine your AGI and taxable income based on this preliminary number.
2. Step 2: Calculate the NOL Deduction Limit
   • Using the taxable income from Step 1, calculate the maximum allowable NOL deduction (80% for NOLs after 2017).
   • If your full NOL carryover is less than this 80% limit, your NOL deduction is the full amount of the NOL. If it is more, your NOL deduction is limited to the 80% figure.
3. Step 3: Recalculate with the NOL
   • Enter the calculated NOL deduction from Step 2 onto your Form 1040 (on Schedule 1).
   • This will reduce your AGI and may change your combined income, which in turn could lower the taxable portion of your Social Security benefits.
   • If the taxable Social Security benefits change, the NOL deduction limit might also change.
4. Step 4: Repeat until it converges
   • Repeat Steps 2 and 3 using the new figures. Continue this process until the numbers stabilize and no longer change. This may only take a few iterations, as noted by tax professionals online. 

Simplified example 

• Filing Status: Single
• Other Income: $40,000
• Total Social Security Benefits (
  SStotalcap S cap S sub t o t a l end-sub

  𝑆𝑆𝑡𝑜𝑡𝑎𝑙
  😞 $20,000
• NOL Carryover (
  NOLfullcap N cap O cap L sub f u l l end-sub

  𝑁𝑂𝐿𝑓𝑢𝑙𝑙
  😞 $30,000 

Iteration 1: 

• Combined Income (no NOL): $40,000 (AGI) + $0 (Interest) + $10,000 (0.5 * SS) = $50,000.
• Taxable Social Security (from Worksheet): Since combined income > $34,000,
  SStaxablecap S cap S sub t a x a b l e end-sub

  𝑆𝑆𝑡𝑎𝑥𝑎𝑏𝑙𝑒
  = 85% of $20,000 = $17,000.
• AGI (no NOL): $40,000 + $17,000 = $57,000.
• Taxable Income (no NOL): $57,000 - $14,600 (2024 standard deduction) = $42,400.
• Max NOL Deduction: 80% of $42,400 = $33,920.
• NOL Deduction for Year: The full $30,000 is less than the limit, so $NOL_{deduct} = $30,000. 

Iteration 2 (using NOL deduction of $30,000): 

• New AGI: $57,000 - $30,000 = $27,000.
• New Combined Income: $27,000 + $10,000 (0.5 * SS) = $37,000.
• New Taxable Social Security: The new combined income is between $34,000 and $44,000, so the taxable amount is calculated using the worksheet. It will be lower than the initial $17,000. For instance, it might now be $15,000.
• New Taxable Income: ($40,000 + $15,000 - $30,000) - $14,600 = $10,400.
• New Max NOL Deduction: 80% of $10,400 = $8,320.
• NOL Deduction for Year: This calculation shows that the deduction is limited to $8,320, not the full $30,000. 

You would continue iterating from this point until the change is minimal. This highlights why simultaneous equations (or an iterative process) are necessary to solve the circular reference. 

Sorry, the copy and paste did not do the formatting necessary. You can try this search on Chrome "simultaneous equations and social security income with NOL on a 1040"

[IRonMaN]

@George4Tacks  - you were insulted 8 months ago, where have you been?

As a side note, does anybody at the IRS know about simultaneous equations? 😀

[JUTaxes]

Thank you George for your thoughtful response.