For those with a medically determinable physical or mental impairment that makes them disabled and unable to engage in any substantial gainful activity, disability payments are essential to their well-being.
Disability benefits are one form of Social Security retirement benefits that, based on multiple factors, the IRS may consider to be taxable income.
Taxes on Benefits Explained
SSA disability benefits are either Social Security Disability Insurance (SSDI) benefits, which are based on your work history, or Supplemental Security Income (SSI) benefits, which are provided to low-income individuals. The majority of both SSDI and SSI benefits are not taxable. But, under some circumstances, you'll be required to pay taxes on these payments.
Read More: Do You Pay Taxes on Disability Payments?
Combined Income and Income Thresholds
If either you or your spouse receives SSDI benefits and have one or more additional sources of income, it's likely the IRS will tax those benefits. What's more, if your income is sufficiently high that your disability benefits are taxed, then it's doubtful that you qualify for SSI benefits, which are paid to low-income applicants. Regardless, the income limits that apply to your SSDI benefits would likewise apply to SSI recipients.
Whether you owe tax on your disability benefits depends, in part, on IRS-defined income thresholds and your "combined income."
Combined Income 2020: Whether you file an individual tax return or file jointly, your combined income governs the percentage of your Social Security disability benefits that are taxed at the federal level. In either case – an individual or a joint return filing – combined income is the sum of your adjusted gross income, nontaxable interest and one-half of your SSI or SSDI benefits.
Income Thresholds 2020: If your combined income is greater than $25,000 per year and you file an individual federal tax return, you may be taxed on as much as 50 percent of your Social Security benefits. If your income is $34,000 or more, 85 percent of your benefits may be taxed.
In turn, if you and your partner file jointly and your annual income is greater than $32,000, you may be taxed on 50 percent of your Social Security benefits. If your income is $44,000 or more, 85 percent of your benefits may be taxed.
These thresholds apply whether your Social Security benefits take the form of SSI and/or SSDI disability payments.
Examples of Taxes on Benefits
File Single in 2020: Assume that you're single and you received $20,000 in SSDI benefits in 2019. Also assume that you had additional income of $15,000 and received $1,000 in tax-exempt interest. Half of your benefit, or $10,000, plus your other income of $16,000 equals a combined income of $26,000. In this case, your income is below the 2020 $34,000 threshold for a single filing status, so only 50 percent of your $20,000 SSDI benefit, or $10,000, is subject to federal income tax.
Married Filing Jointly in 2020: Assume that you're married and that you receive $20,000 in SSDI benefits and your spouse receives $18,000 in Social Security retirement benefits. Also, assume that you and your spouse had additional income of $25,000 plus $1,000 in tax-exempt interest. In this case, half of your total Social Security benefits – $20,000 plus $18,000, or $38,000, multiplied by 50 percent equals $19,000 – plus your other income of $26,000 – equals $45,000. This total exceeds the $44,000 threshold for those filing jointly. Consequently, up to 85 percent of your total Social Security benefit, or $22,300, is subject to federal income tax.
Read More: How Do Income Taxes Work?
Disability Benefits Allocation
If you receive a lump-sum disability payment, and the amount of that payment plus other income exceeds the lower income thresholds of $25,000 if you file a single return or $34,000 if you file a joint return, the IRS allows you to allocate each portion of the lump sum payment to the year to which it relates, rather than to add the entire amount to income for the year in which you receive it.
The Social Security Administration will send you a SSA-1099 form that states the amount of disability backpay that accrued each year before you received the lump-sum payment. You use this information to calculate each relevant year's combined income using the calculation described above.
Based on each year's outcome, you calculate the tax you may owe. If, based on the yearly calculations, which are illustrated above, your combined income was below $25,000 if you file a single return or $34,000 if you file a joint return, you don't owe tax on the backpay for that year.
Reporting Lump Sum SSDI Payment
You can report the backpay to the IRS by making a lump-sum election for each of the years to which the lump-sum payment applies. In this case, you recalculate the tax return for each relevant year using the SSA 1099 breakdown, which indicates the portion of the lump-sum payment that applies to each year.
With this approach, it's a matter of calculating the tax you would have paid if you received a portion of the lump-sum payment in the applicable year. Then, you subtract that total from the tax that you did pay that year. to get the difference Once you perform that process for each applicable year, you net the amounts and add or subtract that number to your current tax liability.
Alternatively, you can report all the income in the year that you receive it. Consider the tax rates for each relevant year and particular aspects of your previously filed returns as you make this decision.
Disability benefits are a Social Security retirement benefit that the IRS may consider to be taxable income. If you receive the benefit in a lump-sum payment, it can be difficult to identify the related tax regulations and calculate the tax you may owe. So, consider talking to a tax accountant or tax advisor who can calculate the tax you owe and help you complete the necessary forms.
- Social Security Administration: Code Of Federal Regulations: Definition of Disability
- Social Security Administration: Disability Evaluation Under Social Security
- Social Security Administration: Why Are Disability Benefits Taxable
- Social Security Administration: Retirement Benefits Income Taxes And Your Social Security Benefit
- Social Security Administration: Disability Benefits
- Social Security Administration: Replacement SSA-1099
- Social Security Administration. "Fact Sheet Social Security and Supplemental Security Income (SSI): What’s the difference?" Accessed Oct. 17, 2020.
- Social Security Administration. "Fact Sheet Social Security." Accessed Oct. 17, 2020.
- Social Security Administration. "Benefits Planner: Disability / How You Qualify." Accessed Oct. 17, 2020.
- IRS. "Frequently Asked Questions: Regular and Disability Benefits." Accessed Oct. 17, 2020.
- Tax Foundation. "2019 Tax Brackets." Accessed Oct. 17, 2020.
- Tax Foundation. "2020 Tax Brackets." Accessed Oct. 17, 2020.
- AARP. "Which States Tax Social Security Benefits?" Accessed Oct. 17, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.