Are Social Security Disability Benefits Taxable?
Three types of benefits are lumped together under the label of Social Security: retirement benefits, disability benefits, and supplemental income. The first two are taxed in the same way based on the total of your income from all sources.
Supplemental Security Income (SSI) isn’t taxed because it’s needs-based. It’s provided to low-income and no-income individuals who own very minimal, if any, assets. By definition, they don’t have sufficient income to meet the thresholds for taxation. But about one-third of those receiving Social Security Disability (SSDI) benefits do pay taxes on at least a portion of what they receive.
Qualifying for Social Security Disability
SSDI benefits are provided to those who can’t work due to a medical condition or other disability. The Social Security Administration (SSA) must come to the conclusion that you can’t do the kind of work you did before you became ill or disabled, that you won’t be able to adjust to doing other work due to your condition, and that your condition has lasted at least a year, is expected to last a year, or will result in death.
It’s not easy to qualify by any means, and you might be taxed on your benefits if you do.
Income Thresholds for Taxation of Benefits
Taxation depends on your level of income from all sources. If there’s a bright spot here, it’s that you only half to include half the SSDI benefits you receive.
But that 50 percent must be added to any the other income you have—earned or unearned. Yes, you have to be unable to work to qualify for benefits so this might seem like a contradiction in terms. The key word here is “all” income sources.
You must add in any unearned income you might have, such as interest or dividends, and you must include any income or benefits your spouse earns or receives as well if you’re married. This includes even tax-exempt interest. The SSA takes the position that your spouse’s income contributes to meeting your financial needs, thus it includes both incomes in its calculations.
The more overall income you earn, the more likely it becomes that you’ll pay tax on a greater percentage of the SSDI benefits you receive. The threshold for taxation begins if your overall earnings including half your benefits exceeds $25,000 a year if you’re single, if you file your taxes as head of household, or if you’re married but file a separate return. This increases to $32,000 if you’re married.
And there’s a catch here: if you’re married but file a separate tax return and if you and your spouse lived together at any point during the tax year, there’s no income threshold. It’s zero. This means you’ll pay taxes on your SSDI benefits even if you have no other income at all. Otherwise, the $25,000 threshold applies if you were separated from your spouse throughout the entire year.
So if you’re single and your income from all sources tallies up to $24,999, your SSDI benefits won’t be taxed. If you earn $25,001, a portion will be.
Keep in mind, too, that these income thresholds mark the beginning of taxation. The amount of your benefits that you’ll be taxed on increases as you earn more over these base limits.
Calculating How Much of Your Benefits Are Taxable
The next part of the calculation determines just how much of your benefits you'll be taxed on.
Let’s say you’re single and your income is less that $25,000 the year. This works out to a monthly threshold of about $2,083. You’re good. Your benefits won’t be taxed. But if you earn $2,084 a month or more than $25,000 annually, you’ll pay taxes on a full half of your benefits – 50 percent. This is the case until you earn $34,000 annually or $2,833 a month. You’ll have to pay taxes on 85 percent of your benefits if you go over this amount.
And if you’re married and file a joint return? You’ll pay taxes on 50 percent of your benefits on joint income of $32,000 to $44,000, and on 85 percent on a joint income of over $44,000.
The Tax Rate on Social Security Benefits
Don’t panic. This doesn’t mean you’ll pay a 50 percent or 85 percent tax rate on your SSDI benefits. They’re taxed just like ordinary income according to your tax bracket.
If your income is $25,001 and you’re single, this puts you in the 12 percent tax bracket as of 2018. You’d pay a 12 percent tax rate on the portion of your income that exceeds $9,525. That first $9,525 falls into the zero tax bracket.
What the 50 and 95 percent figures mean with regard to your SSDI benefits is that 50 percent of your benefits are taxable, at least until your income as a single taxpayer hits $34,000. So if you receive $12,000 in benefits a year, $6,000 of that amount is taxable. If your income is over $34,000 a year, $10,200 or 85 percent of your benefits is taxable.
Of course, if your overall income is really significant, such as because you have some nice investments or because your spouse earns a healthy income, this will put you in a higher tax bracket of up to 37 percent as of 2018. But that’s still a lot easier to swallow than an 85 percent rate on your benefits.
Lump Sum Payments
There’s another way in which you could find yourself in a higher tax bracket. It sometimes happens that the Social Security Administration will make lump sum payments to recipients.
This typically happens if you receive “back pay”—payments for months during which you were disabled but not yet officially approved to receive benefits. Back pay is retroactive and receiving all of it at once could increase your income to the point where you move into a higher tax bracket. It could also bump you up into having to pay taxes on 50 percent or 85 percent of those benefits.
Fortunately, the Internal Revenue Service recognizes this dilemma. The IRS allows you to go back and amend previous years’ tax returns when you receive back pay. You can divvy up that lump sum payment over multiple years dating back to when you first became disabled and applied for SSDI.
Doing so can help keep you in a reasonable tax bracket and it will also help you to avoid going over those earnings limits in the year you receive back pay. You just can’t go back any further than the time period for which the back pay applies.
Reporting the Income
The SSA will obligingly send you tax form SSA-1099 after the close of the tax year. This is the “Social Security Benefit Statement.” The total benefits you received will appear in Box 5. You can transfer this amount to line 20a of Form 1040 or line 14a of Form 1040A. You can’t use Form 1040EZ if you receive SSDI.
Next, enter the taxable portion of those benefits on line 20b of your 1040 or on line 15b of the 1040A—either zero, 50 percent, or 85 percent depending on your overall income. The IRS provides an interactive calculator to help you get it right.
State-Level Taxation of Benefits
These rules apply only at the federal level. Thirteen states also tax Social Security benefits as of 2018: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
The rules are the same as for federal taxes in some of these states, but others have their own formulas and rules, particularly for disability benefits. You might want to check with a tax professional if you live in any of these areas so you know you’re getting your calculations right.
Note: Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.