Are Social Security Disability Benefits Taxable?
Three types of benefits fall under the umbrella of Social Security: retirement benefits, disability benefits, and supplemental income. Retirement benefits and Social Security Disability are taxable based on your total income from all sources. About one-third of those receiving Social Security Disability (SSDI) benefits pay taxes on at least a portion of what they receive.
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.
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, and that you won’t be able to adjust to doing other work due to your condition. Your illness or disability must have lasted at least a year, or it's expected to last a year or will result in death.
You must additionally have worked long enough and recently enough at a job at which you and your employer paid into Social Security to qualify.
Self-employment income will qualify you as well, as long as you paid the self-employment tax, which is both halves of Medicare and Social Security taxes. Normally, your employer would pay half if you worked for someone else.
You'll earn a "work credit" for each $1,410 you receive in earned income in 2020 and each $1,470 in 2021. The number of work credits you need to qualify for Social Security disability benefits depends on how old you are when you become disabled.
Include Your Income From All Sources
Taxation of your benefits depends on your income from all sources. You only half to include half the SSDI benefits you receive, but that 50% must be added to any the other income you have.
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, so it includes both your incomes in its calculations.
The more overall income you have, the more likely it becomes that you’ll have to pay tax on a greater percentage of the SSDI benefits you receive. The threshold for taxation begins if your overall annual earnings, including half your benefits, exceeds:
- $25,000 if you’re single
- $25,000 if you file your taxes as head of household
- $25,000 if you’re a qualifying widow(er)
- $25,000 if you're married but file a separate return
- $32,000 if you’re married and file a joint return with your spouse
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. You’ll have to pay taxes on your SSDI benefits even if you have no other income at all. The $25,000 threshold applies only if you were separated from your spouse throughout the entire year.
As an example, your SSDI benefits won’t be taxed if you’re single and your income from all sources adds up to $24,999, but a portion of your benefits will be if you earn $25,001. The above 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 Is 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 than $25,000 for the year. This works out to a monthly threshold of about $2,083. 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%. This is the case until you earn $34,000 annually, or $2,833 a month. You’ll have to pay taxes on 85% of your benefits if you go over this second threshold.
You’d pay taxes on 50% of your benefits on joint income of $32,000 to $44,000 if you're married and file a joint return, and on 85% on joint income of over $44,000.
The Tax Rate on Disability Benefits
These rules don't mean that you’ll pay a 50% or 85% tax rate on your SSDI benefits. Social Security disability benefits are taxed just like ordinary income, according to your tax bracket.
For example, you'd be in the 12% tax bracket as of the 2019 tax year—the tax return you would file in 2020—if you have an income of $25,001 and you’re single. You’d therefore pay a 12% tax rate on your income—but only on the portion that exceeds $9,700, because this is when the 12% rate kicks in.
The U.S. uses a progressive tax system, with different increments of income being taxed at different rates. The rates climb as your income increases. That first $9,700 falls into the zero tax bracket. You'd only pay 12% of your income from $9,701 to $25,001.
The income increments for tax brackets can shift a little annually to keep up with inflation. The 12% bracket begins at an income of $9,875 in the 2020 tax year for single filers.
The 50% and 85% figures mean that 50% of your benefits are taxable, at least until your income as a single taxpayer hits $34,000, and the other 50% is tax-free. So $6,000 would be taxable if you receive $12,000 in benefits a year. This increases to $10,200 or 85% of your benefits being taxable if your income is more than $34,000 a year.
It would put you in a higher tax bracket, up to 37% as of the 2019 tax year, if your overall income is really significant, such as because you have some well-paying investments or because your spouse earns a good income.
Lump Sum Payments
You could find yourself in a higher tax bracket if the Social Security Administration makes a lump sum payment to you, which it sometimes does.
This typically happens when you receive later receive payments for months during which you were disabled but had not yet been officially approved to receive benefits. Back pay is retroactive, and receiving all of it at once could increase your income for that year to the point where you move into a higher tax bracket. It could also bump you up into having to pay taxes on 50% or 85% 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 benefits. You can divvy up that lump sum payment over multiple years, dating back to when you first became disabled and applied for SSDI.
Going back and amending previous years' returns can help keep you in a reasonable tax bracket and avoid going over these earnings limits in the year you receive back benefits, but you can’t go back any further than the time period for which the back pay applies.
Reporting the Income
The SSA will 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 5a of your Form 1040.
Next, enter the taxable portion of those benefits on line 5b of your 1040—either zero, 50%, or 85% of the total, depending on your overall income. The IRS provides an interactive calculator to help you get it right.
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, although exactly how they do so can vary by state.
The rules are the same as for federal taxes in some of these states, but others have their own formulas and rules 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.
Tax laws change periodically so you should always consult with a tax professional for the most up-to-date advice.
Social Security Administration. "Fact Sheet Social Security and Supplemental Security Income (SSI): What’s the difference?" Accessed Dec. 4, 2020.
Social Security Administration. "Fact Sheet Social Security." Accessed Dec. 4, 2020.
Social Security Administration. "Benefits Planner: Disability / How You Qualify." Accessed Dec. 4, 2020.
IRS. "Frequently Asked Questions: Regular and Disability Benefits." Accessed Dec. 4, 2020.
Tax Foundation. "2019 Tax Brackets." Accessed Dec. 4, 2020.
Tax Foundation. "2020 Tax Brackets." Accessed Dec. 4, 2020.
AARP. "Which States Tax Social Security Benefits?" Accessed Dec. 4, 2020.