Social Security disability benefits assist many people who are unable to work because of a medical condition that qualifies them for disability. The average benefit payments are not extremely high, so some people struggle to make ends meet when they only receive SSDI benefits. Paying for housing, food, and other essentials is difficult enough, but do you also owe income taxes on your disability benefits? The answer depends on your total income; you could owe federal income taxes on up to 85% of your benefits. Keep reading as we give you all the details on whether your Social Security disability benefits are taxable.
Are SSDI Benefits Taxable?
Yes, SSDI benefits are sometimes taxable. However, you won’t owe taxes on your benefits in every situation. There are three scenarios you will encounter regarding the taxability of your benefits. First, you might not have to pay taxes on any of your benefits. Next, you could owe income taxes on half of your SSDI benefits. Finally, you might be required to pay taxes on 85% of your benefits. The final 15% of your benefits is never taxed in any of these situations. Here is how you can determine which scenario will apply in your case.
First, you will need to calculate what the IRS calls your combined income. We will discuss this calculation in more detail in the next section. In this case, combined income refers to the sum of income from different sources and not necessarily income from a spouse. If your combined income is below a certain threshold, then no taxes will be due on your Social Security disability benefits. As your total combined income gets higher, you will pay taxes on a higher portion of your benefits. The highest percentage of your benefits that will ever be taxed is 85%. Keep reading the next section to learn more about the specific calculation used to determine how much tax you will owe.
Calculating Income Taxes On SSDI Benefits
To calculate your income tax that is due on your Social Security disability insurance benefits, you will need to first find your total combined income. You can do this by adding your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. You should receive a Form SSA-1099 from the Social Security Administration (SSA) in January that shows the exact amount of your benefits from the previous year. Even though you won’t pay taxes on your tax-exempt interest, you still must include it in this calculation. Once you have added those three figures together to arrive at your combined income, you will apply the IRS thresholds.
For an individual, no taxes will be due on your benefits if your combined income is less than $25,000. If your combined income is between $25,000 and $34,000, you will owe taxes on half of your benefits. Finally, if your combined income is above $34,000, you will owe income taxes on 85% of your benefits.
For married couples, the threshold numbers are slightly higher. For a married couple, no taxes will be due on Social Security benefits if the couple’s combined income is less than $32,000. For a combined income between $32,000 and $44,000, half of the disability benefits will be taxable. Finally, when a couple’s combined income exceeds $44,000, taxes will be levied on 85% of their disability benefits. Remember, when calculating combined income for a married couple, you will need to add both your income and your spouse’s income plus nontaxable interest plus half of your combined Social Security benefits.
The process above shows you how to calculate the portion of your benefits that are taxable, so how much tax will you owe on those benefits? The answer depends on your overall tax bracket. When creating your tax return, you will need to include the taxable portion of your benefits as taxable income. The tax rate you pay will depend on your total taxable income, and the benefits will be taxed as regular income. If you have any questions about these calculations, you should always consult a tax professional to ensure that you are filing your returns properly for a given tax year.
How To Lower Your Income Taxes On Back Pay
You probably already know that disability benefits do not provide a large income, but back pay can significantly increase your disability income for the year. This is especially true in the year in which you get approved for benefits, and this large lump sum payment can increase your household income so much that you might owe a big tax bill at the end of the year. Once you apply for disability, it can often be a year or more before you finally get approved, so many people often get a large back payment amount. So, how can you track your back pay and lower the amount of tax that you will owe on it? Here is how to do it.
Thankfully, the IRS allows you to apply some of your back pay to prior year tax returns in some cases. For example, suppose you were approved for SSDI benefits, and you were owed 24 months of back pay. That large payment in the current year might raise your annual income so high that you owe taxes on 85% of your SSDI benefits when you file your federal tax return. However, the IRS will allow you to spread that payment out over your tax returns from the two previous years.
By spreading out the back payment over prior income tax returns, your annual income for each year is lowered. Lowering your annual income each year means that a lower percentage of your benefits will be taxable, or you might not owe taxes on your benefits at all. This strategy of lowering your tax liability works regardless of your filing status – whether you are an individual filer or you are filing a joint return. If you need to use this strategy, you will likely want to get the help of an accountant. This method can be complex, and you certainly don’t want to get into trouble with the Internal Revenue Service.
State Taxation Of Social Security Disability Benefits
So far, we have discussed federal taxation of your disability benefits. So, are Social Security benefits taxable at the state level? Some states require you to pay taxes on your benefits, while others do not. In fact, the majority of states do not tax Social Security benefits at all. Only 12 states impose a state income tax on your benefits. These states include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. A few of these states follow the same rules as the federal government, while the others have their own rules.
Even the states that have their own rules on state taxation of disability benefits generally allow exceptions for age and income. If your income is below the state limit, then you will owe no taxes on your disability benefits. Most states that use this method have higher limits than the federal rules, so many people receiving disability benefits in those states end up paying no state taxes.
Do You Have To Pay Taxes On Other Social Security Benefits?
Now that you know the taxation rules for disability benefits, what about other types of Social Security benefits? Here are some of the most common benefits you might receive from the Social Security Administration and the taxation rules that apply.
— Retirement Benefits
Some people believe that once you reach a certain age, you will no longer owe taxes on your Social Security retirement benefits. However, that is not the case! Social Security retirement benefits might count as taxable income, and the rules are the same as for disability benefits. You will need to calculate your total combined income to determine what percentage of your benefits are taxable. For individual or head of household filers, no taxes will be due on your benefits if your combined income is below $25,000. However, if your combined income is above $34,000, then 85% of your benefits will be taxable. You should also know that railroad retirement benefits generally follow the same rules as Social Security retirement benefits.
— Spousal Benefits
Spousal benefits work the same way as disability benefits and retirement benefits. However, you will simply have more sources of income to include when calculating your combined income. You will need to add adjusted gross income plus nontaxable interest plus half of the Social Security benefits from both spouses. Married taxpayers will owe no income tax on their Social Security benefits if their combined income is less than $32,000. Half of their spousal benefits and other Social Security benefits will be taxable if their income is between $32,000 to $44,000. Finally, a married couple will owe taxes on 85% of their benefits if their combined income is above $44,000.
— Survivor Benefits
Again, survivor benefits follow the same rules as disability benefits or retirement benefits. You will need to calculate your combined income to determine what percentage of your survivor benefits may be taxable. Up to 85% of your survivor benefits might be taxable if your combined income is more than $34,000. However, if your combined income is less than $25,000, you will not owe taxes on your survivor benefits.
— SSI Benefits
Supplemental Security Income benefits are a little different than other types of benefits. Since SSI benefits are reserved for those with a financial need, you will never pay taxes on your SSI benefits. These benefits are reserved for low-income individuals and families, so their income should always be under the limit. Qualifying for the program automatically exempts you from paying income tax on these benefits.
The Bottom Line
Social Security disability benefits can be taxable, and the amount of taxes you pay will depend on your total combined income. Total combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Remember that adjusted gross income can include taxable interest, earned income, income from self-employment, and other sources of income. For tax purposes, retirement benefits, spousal benefits, and survivor benefits are treated the same way as disability benefits, although you will never owe taxes on SSI benefits.
Frequently Asked Questions
How much of my Social Security disability is taxable?
Up to 85% of your Social Security disability may be taxable. The specific amount that is taxable will depend on your total combined income. The higher your income for the year, the more of your benefits will be taxable. Depending on where your income lands, you could owe taxes on 0%, 50%, or 85% of your benefits. You will never owe federal income tax on the final 15% of your disability benefits.
How can I avoid paying taxes on my Social Security disability?
You can avoid paying taxes on your Social Security disability by keeping your combined income under the limits. For an individual taxpayer, your income needs to be below $25,000 to avoid paying taxes. Remember that combined income includes your adjusted gross income plus all nontaxable interest plus half of your Social Security benefits. If you received a large back payment during the year, the IRS would allow you to spread that payment out across prior tax returns to help lower your tax bill. Remember that this is not legal advice, so you should always consult an attorney or tax professional to help you with this situation.
Do you have to file taxes on disability income?
Depending on your income, you might have to file taxes on disability income. For an individual filer with a combined income of more than $25,000, you will need to include a portion of your disability benefits in your taxable income. This income will be reported on your tax return, and you will pay regular income taxes on it.
What is the Social Security disability tax rate?
The tax rate you pay on your Social Security disability benefits depends on your total combined income. If your income is low enough, your tax rate could be zero. This means that you might not pay taxes on any of your benefits. However, if your benefits are taxable, you will pay your regular income tax rate on those benefits. You will need to include a portion of your benefits in your taxable income, and you will pay your normal income tax rate based on your overall income.
Can I claim my Social Security disability on my taxes?
Yes, in some cases, you are required to claim your Social Security disability income on your taxes. The percentage that you must claim depends on your total combined income, although your entire benefit might be exempt from taxes if your income is low enough. You should always consult a tax professional to discuss your situation when determining how much to pay in Social Security taxes.