Are Your Social Security Disability Benefits Taxable?
Posted by Elliot Marks
So, you have finally gotten approved for SSDI benefits and started receiving your monthly payments. But now tax time is rolling around, and it is time to file your income tax return with the IRS. Will you owe taxes on the disability benefits that you have received throughout the year? Many people have never even considered the question, "Is SSDI taxable?" It is very possible that you may owe taxes on at least a portion of your benefits. Depending on which state you live in, you might even owe state taxes on your disability income as well. If you need to know more about your potential tax liability, then keep reading as we explain the details.
How Does Social Security Disability Work?
The Social Security Administration has a few different programs to help individuals and families who become disabled and are unable to work. One of these programs is called Supplemental Security Income, or SSI. This program is intended for people who are disabled, blind, or aged and have a financial need. There is no requirement that a person must have a work history to qualify for this program as it is meant to help those with extreme financial hardships. Typically. SSI recipients will not owe taxes on their SSI income because they do not earn enough to require filing taxes at all.
SSDI is another common program for which disabled persons can qualify. SSDI varies from SSI in that qualification for the disability insurance program requires a certain amount of work credits within the past several years. You must have worked long enough and recently enough to be covered under the Social Security Disability Insurance program. This program is not based on financial need, but rather a work history and disability determination. The SSA defines what constitutes a disability, and under the rules, that disability must last or be expected to last at least 12 months to qualify for payments. The benefits that you receive from the SSDI program may be taxable, so keep reading to learn whether your benefits would be subject to income taxes.
Finally, there are the standard Social Security retirement benefits that retirees who have paid into the system over their lifetime will receive. These could be through SSA or the Railroad Retirement Board. These benefits may be taxable, and they are taxed in much the same way as SSDI benefits. Now that you know a little more about how Social Security works, let's take a deeper look into whether your benefits may be taxed.
Is Social Security Disability Taxable?
The short answer to the question, "Is disability income taxable," is maybe. The long answer depends on several factors, mainly your marital status and total taxable income. Most disability recipients do not pay taxes on their benefits because their total income is not high enough to require it. However, about a third of recipients do pay taxes either because of additional income of their own or their spouse's income. Let's dive into the details and help you determine whether you need to pay taxes on your Social Security benefits.
For individuals whose total income is less than $25,000, no federal income taxes must be paid on your SSDI benefits. If your income is between $25,000 - $34,000, then you will owe taxes on half of your SSDI benefits. If your annual income is above $34,000, then the taxable portion of your benefits jumps up to 85%. This does not mean that you will pay 50% or 85% tax rates. Your rates will be based on whatever tax bracket you fall into based on your income. It simply means that either 50% or 85% of your benefits must be counted as income and are taxable.
For married couples filing jointly, the numbers are slightly different. If you are married filing jointly and your combined annual income is less than $32,000, then you will not owe taxes on your benefits. If your income is between $32,000 - $44,000, then half of your benefits are taxable. And if your combined income falls above $44,000, then 85% of your disability payments are then taxable.
In some cases, SSDI recipients may receive a lump sum payment, or back payment, for benefits that accrued during the approval process. This larger back pay amount can have a big impact on your reported income for the year and may require you paying higher taxes on your benefits during that year. In that case, it is possible to amend your tax returns from previous years to help spread out that tax burden. You should always consult a tax professional with questions regarding this process.
What Is The Tax Rate on Disability Benefits?
A lot of people want to know how much Social Security pays, so the next logical question would be how much tax is owed on these payments. The tax rate that you will pay on your benefits depends on your total income for the tax year, not just your disability payments. You must report your net income for the year from your disability payments. This amount is found on your Form SSA-1099 on your Social Security Benefit Statement that you receive from SSA at the end of the year. You must report this income on your Internal Revenue Service Form 1099 along with all other income for the year, including tax-exempt interest and other employment, even self-employment. If one half of your SSDI income plus all your other income is above the base amounts mentioned in the previous section, then a portion of your benefits payments are taxable.
The tax rate that you will pay on the taxable portion of your benefits depends on which tax bracket you land in. The IRS tax brackets for 2021 are as follows:
- 37% for incomes over $523,600 ($628,300 for married couples filing jointly)
- 35% for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10% for incomes of $9,950 or less ($19,900 for married couples filing jointly)
Do You Need to File Taxes If You Receive Social Security Disability Benefits?
Yes, you do need to file your taxes if you receive benefits through Social Security such as retirement benefits or disability payments. Whether or not you owe taxes on these payments is a different story. Most people receiving disability payments do not end up owing any taxes on them because their income is not high enough to require it. The disclaimer to that is when you have additional income such as from an IRA or file a joint return with a working spouse that puts your total income high enough to require paying taxes on a portion of your benefits.
You should always consult a tax professional on the proper way to file your taxes and report your Social Security income. There is a place on your return to report the total benefits you received through SSDI and a separate line where you report the taxable portion of those benefits.
Federal Taxation of Social Security Disability Benefits
As mentioned previously, recipients of SSI benefits get an exemption from taxes on these benefits because they are based on a substantial financial need. However, if you receive disability benefits, these payments may be taxed depending on the amount of your total income. If you are married and file a joint return with your spouse, then your spouse's income would count toward your total household income. So, if you're pondering the question, "Is Social Security disability income taxable," the answer is yes.
The total amount of your benefits will need to be shown on your tax return; however, some calculations are necessary to determine what percentage, if any, of those benefits will be taxed. Either none of your benefits will be taxed, 50% of them will be taxed, or 85% of them will be taxed. The more money you make, the higher the percentage of your benefits that will be taxed. These cutoff points were detailed earlier in this article, so simply refer back to that section to determine what percentage of your payments you will be paying taxes on.
State Taxation of Social Security Disability Benefits
We already learned that disability payments can be taxed at the federal level, so do you pay taxes on Social Security disability at the state level? Most states do not tax disability income; however, there are a few that have other rules. Most of the states that tax disability income follow the same income brackets as the federal government for determining how much of the benefits are taxable. Some states set their own rules and their own system for taxing your benefits. The following states tax disability benefits in one way or another:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
You should consult your accountant or your state's rules for information regarding the requirements in your specific state.
If you are receiving SSI payments, then you do not have to worry about paying taxes on those because they are exempt. So, people wondering about the question, "Is SSI taxable," can relax. However, if you are receiving SSDI or retirement benefits, then you might owe some income taxes on those payments. You'll need to calculate your total household income for the year to determine what percentage of your payments might be taxable. The amount of tax you pay depends on which tax bracket that you fall into based on your overall taxable income. Either way, you should know that you do need to report your disability income and be aware that you might owe some taxes on at least a portion of those benefits.