Tax Implications

If you’re receiving disability benefits from Social Security, you might be wondering, “is social security disability taxable?” The answer is yes. Social Security Disability Insurance (SSDI) benefits are subject to tax if your income exceeds the federal limits.

Most recipients do not have to pay taxes on their benefits because most people who meet the criteria to qualify for benefits have little or no additional income.

However, those who do have to pay taxes on SSDI benefits usually have other substantial income sources, or their spouse does.

If you have questions about your disability claim, we encourage you to contact our experienced disability attorneys for more information.

When Are Disability Benefits Taxable?

Your total income is determined by adding one-half of your disability benefits to all other sources of income. Your total income includes wages, pensions, interest, dividends, capital gains, and any tax-exempt interest you earned.

According to the Internal Revenue Service (IRS), part of your Social Security benefits is taxable if:

• You are single, and your total income is more than $25,000.
• You are married filing jointly, and the total income is more than $32,000

If you and your spouse receive benefits, you take half of your Social Security, plus half of your spouse’s Social Security, and add that to any other income. If the total income is more than $32,000, part of your Social Security benefits will be taxed.

Supplemental Security Income (SSI) will not count as additional income if you receive SSDI and SSI because SSI benefits payments are not taxed. SSI recipients usually do not pay taxes because their total income is below is less than $25,000 or $32,000 if married filing jointly.

To learn more about tax implications, complete the free evaluation form on this page.

At What Rate Are Disability Benefits Taxed?

50% of an individual’s benefits may be taxable if:

– Filing single, head of household, or qualifying widow or widower with income between $25,000 and $34,000.
– Married, filing separately, and lived apart from their spouse all year with income between $25,000 and $34,000.
– Married filing jointly with income between $32,000 and $44,000 income.

Up to 85% of an individual’s benefits may be taxable if:

– Filing single, head of household, or qualifying widow or widower with an income of more than $34,000.
– Married filing jointly with income of more than $44,000.
– Married, filing separately, and lived apart from their spouse for all year with an income of more than $34,000.

These guidelines do not mean that you will pay a 50% or 85% tax rate on your benefits. Disability benefits are taxed just like ordinary income, so your disability benefits would be taxed at your marginal tax rate if your income is higher than the limits listed above.

For example, you would probably pay about 10-12% taxes on 50%-85% of your benefits, assuming your tax rate is 10-12%. Higher-income people might pay taxes of 22-24% on 85% of their benefits.

Need immediate assistance with your disability claim? Contact Disability Apply! You pay nothing upfront or out-of-pocket!

Is There State Taxes on Disability Benefits?

In 2020, thirteen states tax benefits to some extent. Those states were:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• Utah
• Vermont
• West Virginia

Most of these states set similar income criteria as the federal government (above) to tax SSDI benefits, but others have their state tax system for disability benefits.

Backpay And Tax Implications

Most people approved for Social Security disability do not receive their first payment until months or even years later and receive back pay for the months they have waited. This backpay is paid in a lump sum, and it can be a large amount.

If you received a lump-sum payment for retroactive benefits, it could increase your income for the year and cause you to have to pay taxes on 50% or 85% of those benefits. Backpay could increase your income for that year to the point where you move into a higher tax bracket.

Fortunately, if your backpay was for monthly benefits from an earlier year, you might be able to apply the income to an earlier year to lower your tax bill. The IRS allows you to go back and adjust previous years’ tax returns. You can allocate the lump sum payment back to when you first became disabled and applied for benefits.

Learn more about how much disability back pay you will receive.

Questions About Tax Implications? Disability Apply Can Help

If you recently received benefits and  were wondering, “is social security disability taxable?”  The answer is yes, but most recipients do not pay taxes. In summary, the portion of taxable benefits depends on the individual’s total income and filing status.

Navigating the tax treatment around disability payments can be tricky, which is why we are here to help. For more help in determining if you need to pay tax on disability benefits, contact us today or fill out our online form.