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Is Social Security Disability Income taxable?
Your benefits alone aren’t enough to make you owe taxes, but other income can push you over the line.
Your Social Security Disability Income (SSDI) can be a lifesaver when an illness or injury makes it impossible for you to continue working. But it can also be difficult to know what to do during tax season, and whether your SSDI is subject to income tax. Typically it’s not, but lump sum back payments, other income and spousal income may change that.
Are Social Security Disability Income benefits taxed?
Yes. The IRS set up an income threshold for those receiving SSDI benefits, and if your income exceeds that threshold, a percentage of your SSDI is subject to federal income tax. You may also owe state income tax, whether or not you cross federal limits.
What is the IRS threshold?
For 2020, as long as your combined annual income is less than $25,000 as an individual or $32,000 as a married spouse filing jointly, you don’t have to pay taxes on your SSDI. But make even one dollar over those limits and a percentage of your SSDI is considered taxable income.
Calculate your combined income as half of your SSDI benefits plus all other sources of income, including tax-exempt interest. For example, if you collect $12,000 a year in SSDI benefits, $6,000 is considered income. If you make $10,000 a year working a part-time job, your combined income is $16,000. The following threshold limits determine how much of your SSDI benefits are taxable:
|Filing status||Annual income||SSDI taxed at|
|Married filing jointly||$0–$32,000||0%|
|Married filing jointly||$32,001–$44,000||50%|
|Married filing jointly||$44,001+||85%|
|Married filing separately||Any income||50% up to $34,000, 85% $34,000+|
How to calculate the amount you’ll be taxed
When your income is more than the threshold set by the IRS, you can determine how much of your SSDI benefits are taxable, either 50% or 85%.
For example, if you make $12,000 a year in SSDI benefits, but your income is still less than $34,000 as an individual, add 50% or $6,000 to your taxable income for the year. If you make more than $34,000, add $10,200 to your taxable income, which is 85% of your benefit.
Your taxes you pay are based on your tax bracket. Keep in mind that your spouse’s income and your unearned income, such as taxable interest and dividends, are added to your taxable income as well.
What to look out for
Because the application process for SSDI can take a long time, and the decisions are retroactive, you may receive a lump sum of backpay for the months you were disabled but your application wasn’t yet approved. If you add that lump sum to your SSDI income for the year, it could push your earnings over the thresholds or even drive you into a higher tax bracket.
To avoid this, the IRS allows you to spread out the backpay as income over several years by amending your past returns dating back to the date you first applied for Social Security Disability, which is the earliest month that the backpay might apply. Your tax advisor can help you with your options.
Which states tax SSDI benefits?
Your SSDI benefits are subject to state income taxes in 13 states, but to varying degrees. If this is your first year filing with disability income, contact a local tax professional to walk you through the specifics of your state.
These states fully tax your SSDI benefits as income, with few if any exemptions for low income and senior status:
- New Mexico
These states use the federal guidelines to collect state income tax on your SSDI benefits:
- North Dakota
- Rhode Island
- West Virginia
These states use your federal Adjusted Gross Income (AGI) to determine your state income taxes on your SSDI benefits:
Who’s eligible for Social Security Disability Income benefits?
SSDI benefits are available to those who are considered totally disabled for a year or more. That means they can no longer do the work where they were previously employed and can’t adjust to another form of work that offers meaningful employment because of their illness or injury.
To qualify for income benefits, you must make less than $1,260 a month on average. This income is combined with half of your SSDI benefits and any other unearned income. This total determines if your SSDI benefits are taxable. Because most SSDI applicants rely on their benefits for financial support, they likely don’t have income that meets the taxable income threshold.
How to report your Social Security Disability Income
Every January, you’ll get a Social Security benefits statement (SSA-1099) to use when you file your taxes. Follow these steps to include your benefits on your 1040 or 1040A forms. You can’t use a 1040EZ if you receive SSDI benefits.
- From Box 5 on the form, get the total of your benefits for the year. Use this figure for line 20a on your 1040 form or line 14a on your 1040A form.
- Use the IRS interactive calculator to determine the taxable portion of your benefits, which will be 0%, 50% or 85%, depending on your combined income.
- Enter the taxable portion of your benefits for line 20b on your 1040 form or line 15b on the 1040A form
How can I avoid having taxable disability income?
The most obvious way to avoid having to pay taxes on your SSDI benefits is to reduce your income, both earned and unearned, so that you don’t meet the threshold. But that’s not a realistic choice for many who live in areas with higher costs of living.
You may also consider reinvesting any dividends or earned interest into a tax-deferred investment to keep your income as low as possible. For example, your earned interest on a Certificate of Deposit must be reported as income, but if you invest in an annuity that’s set up to reinvest your interest, that interest is tax deferred.
What’s the difference between private disability insurance and SSDI?
Private disability often has a wider definition of what it means to be disabled and pays a benefit based on a percentage of your current paycheck. You can draw both your private disability and SSDI, but often your insurance company reduces the amount it pays you by the amount of your SSDI benefit. Some long-term disability insurers may require you to apply for SSDI after a certain amount of time.
Whether your private disability income is taxable depends on whether you pay the premiums with pre-tax or post-tax dollars. That income does add to your total income to determine whether your SSDI is taxable.
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If your SSDI benefits are your only source of income, they are most likely not taxable. But you can request a withholding from the IRS to make sure you don’t owe when you file your taxes the following year. And if you’re not yet disabled and worried that SSDI wouldn’t cover all your bills, consider shopping around for a disability insurance policy that might put you in a better position in the long run.
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