The Social Security Administration (SSA) provides two different types of disability benefits — one is taxable, the other is not. If you receive Supplemental Security Income (SSI) benefits, you will not have to pay income taxes on those payments. However, if you receive Social Security Disability Insurance (SSDI), a portion of those benefits will be taxable if your income exceeds a certain amount.
How do I know if my Social Security disability benefits are taxable?
SSDI benefits are taxable, but because most disability recipients do not have much income, they generally do not pay taxes on the benefits or at least not on the full amount.
The Social Security Administration (SSA) will send you a Form SSA-1099 in January for any tax year in which you receive SSDI. The net amount of disability benefits you received will appear in Box 5 of the form. Your tax liability for the benefits depends on your total income and benefits from the year.
Your income must exceed a certain threshold for your SSDI benefits to be taxable:
- If your filing status is single and you made more than $25,000 or;
- If you are married and your income and your spouse’s income totaled more than $32,000, then a portion of your SSDI benefits will be taxable.
What percentage of my SSDI benefits are taxable?
If your income exceeds the aforementioned thresholds, the Internal Revenue Service (IRS) will tax your SSDI benefits accordingly:
- Individuals: If your annual income totaled between $25,000 and $34,000, then 50 percent of your disability benefits are taxable. If your income exceeded $34,000, then 85 percent of your benefits are taxable.
- Married couples: If you and your spouse’s combined annual income totaled between $32,000 and $44,000, then 50 percent of your disability benefits are taxable. If your income exceeded $44,000, then 85 percent of your benefits are taxable.
You will report your total disability income for the year and the taxable portion of the benefits on Form 1040, lines 20a and 20b or Form 1040A, lines 14a and 14b. You can figure out exactly how much of your Social Security disability benefits are taxable by using the Social Security Benefits Worksheet, found in the Instructions for 1040. The worksheet is quite confusing, though. Speak to your attorney or tax professional for more information.
Are disability back pay lump sum payments taxable as well?
Any lump sum payments you receive for retroactive SSDI benefits you were due can bring your income for that year above the taxable limit thresholds, and increase your chances of having to pay taxes on your benefits. And the IRS requires you put the entire lump sum for that year’s income, regardless of whether it was for a previous year.
However, depending on your circumstances, you might be able to report a lower taxable benefit. The IRS recommends filing out worksheets 1; 2 or 3; and 4 to determine whether you qualify. As with the Social Security Benefits worksheet, these worksheets are full of confusing, complex language. We recommend getting assistance from a tax professional to determine how much of your lump sum payment is taxable.
On the SSA-1099 form that you receive, the SSA will note the amount of your lump sum accrued in previous tax years in Box 3.
Note: You do not have to refile taxes from a previous year to apportion that amount to the respective tax year. Rather, the IRS allows you to handle the matter on your current year’s taxes. For example, if you received a lump sum of $10,000 in 2016, but $5,000 of that was for benefits that were owed to you in 2015, you can apportion $5,000 to your 2015 income, and the remaining $5,000 towards your 2016 income.
You can learn more about how this is done by reading Publication 915: Social Security and Equivalent Railroad Retirement Benefits.
TIP: To be safe and cover yourself, you might want to set aside 30 to 35 percent of any lump sum disability payments you receive for tax purposes until a tax professional assesses your liability.
Speak to a disability attorney about your benefits – for FREE.
Income taxes and Social Security disability benefits are very complex. The IRS provides numerous instructional booklets and worksheets to assist you, but many are filled with confusing terminology and math equations. For help determining your taxability on disability benefits, contact the Disability Advantage Group and request a free consultation with a Social Security disability lawyer: 865-566-0800.