If your income from other sources exceeds a certain threshold, Social Security disability benefits may be taxable. However, most beneficiaries do not have to pay taxes on their benefits because most people who meet the strict eligibility criteria for these programs have little or no additional income.
Disability programs are provided through the Social Security Administration (SSA) to people who cannot work because of a serious disability or medical condition. These benefits can help people with their living expenses and medical expenses. Although the funds are usually not included in taxable income, you may end up having to pay taxes on these payments in some cases.
If you have any confusion about whether the benefits you receive are taxable as income, you can contact a disability attorney to learn more about the thresholds and eligibility criteria. Your lawyer can suggest different techniques that you can use in your disability benefits application to avoid unnecessary denials during the process.
Things to Know About Disability Payments
Social Security disability benefits are paid monthly, usually in the form of direct deposit. Strictly speaking, disability benefits can be categorized as income. However, not all income is treated equally when it comes to the Internal Revenue Service (IRS). For tax purposes, the IRS distinguishes two types of payments: earned and unearned. Earned income includes wages, salaries, or tips accrued from employment or self-employment.
Other types of income, such as child support, alimony, retirement income, and disability benefits, are considered to be non-labor income. In short, although they are income, the way the federal government levies taxes on this type of income is different from traditional income. The SSA follows different disability benefits over 50 rules so it is suggested that you read all of the rules carefully before taking any step.
Do I have to pay taxes on disability payments?
The SSA reports that only about one-third of Social Security Disability Insurance (SSDI) beneficiaries end up paying taxes on their benefits each year. Almost no beneficiaries who receive Supplemental Security Income (SSI) will have to pay taxes on these benefits because the recipients have been designated as low-income individuals.
In short, almost all income, including disability benefits, may be taxable. However, whether you will actually be taxed can depend on the following key factors:
- Extra income
You only need to pay federal taxes on your disability income if your total income exceeds the threshold set by the federal government. You can calculate your total revenue by adding half the disability benefit to any additional income. The current limit is $25,000 per year.
The taxable portion of your disability income depends on how much your total income exceeds the federal threshold. If your total income is $25,000 to $34,000, you can expect up to 50% of your disability income to be considered taxable. If your total income exceeds $34,000, 85% of your benefits may be taxable.
- Marital status
If you are married or filing a joint tax return, the annual income threshold for you and your spouse is slightly higher, at $32,000. By filing a joint return, you may only include half of your benefits in your total income.
If the combined income that you and your partner receive is within the range of $32,000 to $44,000, your disability income may be taxable up to 50%. If your combined income exceeds $44,000, 85% of your SSDI benefits can be taxed.
- Back payments
In some cases, you may receive back payments for the time you were disabled but not receiving benefits, as well as one-time death payments for the survivor of a deceased worker who had been receiving benefits. These benefits are typically paid in a lump sum by the SSA.
The total payment for death benefits and back payments might be taxed for the year, putting you in a higher income bracket and increasing the amount of taxes you must pay. To avoid losing some of the arrears in this way, you can apply the SSDI benefits you were owed from the year before to your previous tax return, thus reducing your income in the year you received the balloon payment.
For example, if you were entitled to benefits for 22 months before you received your back payment, you could modify your tax returns for the previous two years to apply the income to those years instead.
- Where you live
Your state tax laws may have an impact on whether you will need to pay taxes on your SSDI benefits. Although many states do not automatically tax Social Security benefits, 13 states have exceptions to this rule. Generally speaking, these taxes have a similar effect as federal income thresholds.
Most disabled beneficiaries do not owe taxes
In practice, many SSDI beneficiaries do not face this problem because their overall income is too low to meet the tax threshold. These benefits are designed to support people who are unable to work because of serious illness, as the SSA strictly limits the amount of income you can earn from work while still maintaining your eligibility for SSDI. In 2021, the income limit for most beneficiaries is $1,310 per month.
According to the SSA, approximately one-third of disabled beneficiaries pay taxes on their benefits. When they do this, it is usually because of other family income, such as a spouse’s income.
Knowing whether you will have to pay taxes on your disability benefit payments can be confusing. Our San Antonio Social Security disability lawyer has many years of experience helping clients get the benefits they deserve.