Is Social Security disability income taxable?

About one-third of people have to pay federal income taxes on portions of their Social Security Disability Insurance (SSDI) benefits. Typically, these individuals have other sources of income, such as wages, self-employment, interest, dividends, or other taxable income reported on their tax return.

Will your SSDI benefits be taxed?

Many recipients of Social Security benefits, including retirement, survivors, and disability benefits, will have to pay Federal Income Tax on their benefits if their annual income exceeds certain amounts defined by Federal Tax law.  Supplemental Security Income (SSI) payments are not taxable.

Each January recipients of Social Security benefits should receive Form SSA-1099 showing the total Social Security benefit received in the previous calander year.  The amounts on this form will be needed to complete the annual tax return.  


Who needs to file a tax return?

The Internal Revenue Service (IRS) requires the filing a tax return if their total income exceeds a certain amount in the given tax year.  In general, if an individual’s only source
of income was social security benefits of SSEB, the benefits are probably not taxable, and a tax return probably does not need to be filed.  If an individual receives income in addition to their federal benefit payments, they may have to file a tax return.  For 2013, if income levels exceed the following, a tax return is required:

If your filing status is…

AND at the end of 2013 you were*…

THEN file a return if your gross income** was at least…

Single

under 65

$10,000

65 or older

$11,500

Married filing jointly***

under 65

$20,000

65 or older (one)

$21,200

65 or older (both)

$22,400

Married filing separately

any age

$3,900

Head of household

under 65

$12,850

65 or older

$14,350

Qualifying widow(er) with dependent child

under 65

$16,100

65 or older

$17,300

* If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013.
**Gross income means all income you received in the form of money, goods, property and services that is not exempt from tax, including any income from outside the United States or the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013 or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).

*** If you did not live with your spouse at the end of 2010 (or on the date your spouse died) and your gross income was at least $3,650, you must file a return regardless of your age.

Source:  1040 Instructions, Department of the Treasury Internal Revenue Service IRS.gov

 

How are Social Security benefits taxed?

No one pays federal income tax on more than 85 percent of Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

  • file a federal tax return as an “individual” and your combined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits
    • more than $34,000, up to 85 percent of your benefits may be taxble. 
  • file a joint return, and you and your spouse have a combined income* that is
    • between $32,000 and $44,000, you may have to pay income tax on, up to 50 percent of your benefits
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits. 

*Note:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income

Source: Taxes and Your Social Security benefits; Social Security Online; www.ssa.gov


How is a lump-sum retroactive payment of SSDI benefits taxed?*

When a claim for Social Security Disability benefits is awarded, there is often a large lump-sum payment of retroactive benefits dating back to the date of entitlement for those benefits.  This retroactive sum will often include monetary benefits for a period of disability for an earlier year than the calendar year in which they were paid.  The taxable part of this retroactive benefit is included in the income of the calendar year in which it was received, even if there are benefits for an earlier year.

Generally, income in the calendar year benefits are received is used to figure the taxable part of the retroactive benefits received in that year.  However, the taxable portion of retroactive benefits covering an earlier year may be figured using your income for the earlier year those benefits cover.

As these calculations can be very complicated and difficult, we highly recommend that you work with a tax professional in preparing your tax return.


Are there any deductions related to the award of Social Security benefits?*

If disability payments were received from an employer or an insurance company that were included as income on a tax return in an earlier year, you may be required to repay the employer or insurance company if  a lump-sum retroactive payment from Social Security is received.  An itemized deduction may be taken for the part of the disability payments from the employer or insurance company that was included as gross income in the earlier year’s tax return.  If the amount repaid is over $3,000, a tax credit may be claimed instead.

You can usually deduct the expenses paid to a representative who produced taxable income.  Therefore, any fee paid to The Advocator Group for generating your SSDI award may be deductible on your tax return.

*Source: IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits

 


For more information about the potential taxation of your SSDI benefits, consult your tax professional, or find your local IRS office.