Is SSDI Income Tax Exempt?

If your income exceeds certain thresholds, some or all of your SSDI benefits could be subject to taxation and it is crucial that you speak with a special needs planner about this potential scenario.

SSDI benefits and other income can generally be included in your taxable income for individuals who are single, heads of household, or qualifying widow(ers), although your actual taxable income might exceed this threshold.

What is the Income Threshold?

Typically, the IRS taxes SSDI income only when one half of an individual’s benefits plus other sources exceed a set base amount, which varies based on their tax filing status (Congressional Research Service: Social Security: Calculation and History of Taxing Benefits by Christine Scott on 2/20/13.).

Assuming a beneficiary is unmarried and does not have other income sources, their SSDI benefits will only become taxable if their total earnings surpass $25,000; however, for married filing jointly filers the threshold increases to $32,000.

When receiving retroactive SSDI payments that substantially increase income in one year, recipients may wish to apply these benefits against prior years’ tax returns in order to reduce overall income for those years and avoid overpaying taxes in those prior years. Before making decisions that affect federal tax situations, recipients should consult a qualified tax preparer.

How is the Income Threshold Determined?

Most SSDI recipients do not owe income taxes on their SSDI benefits; however, Social Security Administration guidelines state that up to 85% may be subject to taxes if both you and your spouse earn significant other household income. You should consult local/state tax authorities or an accountant regarding what the rules are in your area.

To determine whether SSDI payments will be subject to federal income tax, the Social Security Administration first indexes your previous wages with current costs of living and adds other sources of income, including W-2 wages from work or part-time earnings at another job, interest income on savings accounts or investments, stock dividends, retirement income from traditional or Roth 401(k) accounts or tax-exempt annuity interest – then adding half your SSDI benefit as provisional total income.

How Much of My Benefits Are Taxable?

At what income threshold do I start paying taxes for SSDI benefits and other income sources? For instance, receiving an SSDI back payment due to time lost on the disability waiting list may push your total income over the threshold and require you to begin paying taxes.

In this instance, the IRS will tax 85% of SSDI benefits that exceed their threshold threshold as well as all income such as wages, dividends and interest received tax-free.

To avoid incurring an overwhelming tax bill, it may be beneficial to have the Social Security Administration withhold some money from each check to pay federal taxes owed. This amount will appear on your annual SSA-1099 benefit statement or you could file your federal return each year and report SSDI income in Box 5 of Form 1040.

How Do I Pay Taxes on My Benefits?

As part of your tax return, up to 85% of SSDI benefits may be included depending on your household income and filing status, the type of benefit received and other sources of income. The exact percentage taxed will depend on each factor involved.

Applying and being awarded disability benefits can be an arduous and drawn-out process, yet when finally receiving that check it may come as a relief – only later to discover some will go directly back to the IRS in taxes.

An expert special needs planner or accountant can be invaluable when calculating and calculating your tax liability, helping to eliminate surprises on Tax Day. The IRS provides worksheets in Publication 915 that can assist with this calculation, while an experienced planner may offer tips to reduce income below the taxable threshold so as to preserve more benefits and maximise benefits retention.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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