Taxability of Social Security Disability Income
As the saying goes, only death and taxes are certainties; unfortunately disability benefits may be tax-exempt in certain instances.
SSDI taxes typically only become due when an individual’s combined provisional income (composed of half their Social Security benefit plus all other income sources) exceeds $25,000 for single filers or $32,000 for married couples filing joint returns.
What is the taxable amount of my SSDI benefits?
The Internal Revenue Service determines a beneficiary’s taxable SSDI benefits by adding half of their annual award with other income, then comparing this figure against an income threshold that varies based on filing status. If their SSDI award and total income surpass this threshold, up to 85 percent of their SSDI benefits could be subject to taxes.
Other sources of income could include wages from work, investment gains and dividends from stocks or mutual funds, bank interest payments and retirement income from an IRA or 401(k). To accurately calculate and file taxes on this income it’s advisable to seek professional advice when filing tax returns.
Retroactive SSDI awards may increase your income for the year they were received, which could alter the amount of taxes due. In this instance, it would be prudent to amend previous tax returns by decreasing income; otherwise you might pay unnecessary tax.
Are my back pay benefits taxable?
When receiving back pay, it’s essential to understand how the IRS will tax it. Like regular monthly SSDI payments, backpay must be reported on federal tax returns as income. A lump sum award could tipped over the threshold where taxes become due and increase your tax bill for that year.
Use IRS Publication 915 worksheets and Allsup’s free online tool to ascertain how much of your retroactive disability check is taxable, or consult an experienced disability attorney about calculating taxable portions in lump sum payments.
Keep in mind that, if you’re married, the amount of your Social Security benefits which may be subject to tax depends on both of your combined income. Furthermore, the IRS may apply a higher marginal tax rate to married couples than single individuals.
Do I have to pay state taxes on disability benefits?
The IRS taxes SSDI benefits similarly to regular Social Security benefits; however, each state may have its own rules regarding whether or not SSDI benefits should be taxed. To find out whether your state taxes SSDI benefits, the best way is to contact an accountant or Social Security Disability lawyer; depending on where you live they may help withholding taxes from SSDI checks throughout the year and filing returns on your behalf.
To determine whether your SSDI benefit is taxable, the IRS considers half of it plus any other sources of income you receive, such as earnings from work and investment income like stocks and dividends, retirement savings in a 401(k) or traditional IRA account, tax-exempt interest or any other source. If your income is high enough, state taxes will likely apply as well; our experienced SSDI attorneys can help explain how your disability benefits are taxed.
Do I have to file a tax return?
Most individuals do not need to file tax returns if their combined SSDI and non-SSI income does not surpass a threshold which varies based on filing status. If however, your total income exceeds this threshold (such as tax-exempt interest payments), then you will be required to file.
If your SSDI benefits are becoming taxable, one solution could be asking SSA to withhold money from each payment that goes to the IRS for taxes on them. Alternatively, back pay benefits owed from prior years can also be applied towards your taxes as income. It is wise to consult a tax professional first as they will help determine the most efficient approach and minimize potential tax liabilities.
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