If Social Security disability benefits are your only source of income, the benefits aren’t taxable by IRS. But if you (or your spouse, if you are married) have significant additional income, a percentage of your disability benefits will be taxable. About one-third of Social Security beneficiaries pay taxes on their benefits.
When Are Social Security Disability Benefits Taxable?
Whether or not your disability benefits are taxable will depend whether your income and your spouse's income are below certain amounts. For the purpose of determining if your benefits are taxable, you add one-half of your disability benefits to your income (and you can’t exclude anything from your income, like tax-exempt interest or adoption benefits).
Then you compare this combined income figure to the following amounts:
- If you are single and make between $25,000 and $34,000 per year (as of 2011), 50% of your disability benefits will be federally taxable.
- If you are single and made more than $34,000, 85% of your benefits will be federally taxable.
- If you file jointly with your spouse and your joint income is between $32,000 and $44,000, you will be taxed federally on 50% of the benefits.
- If you file jointly and your combined income is over $44,000, you will be taxed federally on 85% of the benefits.
Is SSI Taxable?
If you receive SSI (SSI refers to Supplemental Security Income, which is available to those whose income and resources are below a certain level), your benefits aren't likely to be taxable, because if you make that much money, you wouldn’t be eligible for SSI. So the above taxes usually apply only to recipients of SSDI (Social Security Disability Insurance, which is available to those who have paid Social Security taxes for a number of yeas).
Are Children's SSDI Benefits Taxable?
If your children receive Social Security benefits, those benefits are not taxable to you and should not be included in the above income calculation.
Is Disability Backpay Taxable?
There are specific rules regarding taxation of Social Security backpay that can vary based on the situation. For example, if you are using the proceeds from those benefits to repay a long-term disability insurer or other insurance carrier for costs incurred, the disability benefits might not be not taxed. In addition, if oart of the backpay was actually monthly benefits from a proper year, you can report that income for a prior year if it would lower your tax bill. The IRS provides worksheets about the taxability of Social Security benefits in IRS Publication Number 915, Social Security, and Equivalent Railroad Retirement Benefits.
Do the States Tax Disability Benefits?
Most states do not tax Social Security benefits. Of the states that do, some of them follow the federal system, above, but some tax less and some tax more. To find out if and how your state taxes Social Security benefits, you should contact your state tax office for information.
Are Private Long-Term Disability Benefits Taxable?
If your employer purchased and paid the premiums on a long-term disability policy, you are required to pay taxes on the benefits paid out to you. If you purchased a disability policy and paid the premiums yourself, then the payouts from that policy are not going to be taxable.