Are State Short-Term Disability and Social Security Disability Benefits Taxed?

Question: Are Short-Term or Social Security Disability Benefits Taxed?

I've been collecting state short-term disability benefits and it's my understanding that my state doesn't tax these benefits, so I didn't think federal disability benefits would be taxable either. But someone told me this isn't true and that I will get taxed on my Social Security disability benefits. Who's right?

Answer: It Depends on the Type of Disability and Who Is Doing the Taxing

The taxation of disability benefits is a complicated area. There are federal, state, and private disability benefits, plus two levels of possible taxation: federal and state. Let's go through them one by one.

State Taxation of State Disability Benefits

First, about state short-term disability insurance (SDI or TDI), some states do tax their residents on these temporary disability benefits, so you got lucky if your benefits aren't taxed.

California, New Jersey, and Rhode Island do not tax state-paid short-term disability benefits, but New York and Hawaii partially tax these benefits, depending on how much your employer contributed to the cost of the insurance and how much you contributed to the cost of insurance.

You can find out more in Nolo's series of articles on state short-term disability.

Federal Taxation of State Disability Benefits

The federal government doesn't tax:

• short-term disability benefits in California (unless the SDI payments are a substitute for unemployment insurance), or
• temporary disability benefits in Rhode Island.

But since employers in the following states pay for part of the benefit, the federal government will partially tax:

• temporary disability benefits in New Jersey
• short-term DBL benefits in New York, and
• TDI benefits in Hawaii.

So, just because your state doesn't tax your short-term disability benefits doesn't mean the federal government won't.

Federal Taxation of Federal Benefits

Whether you'll be taxed on Social Security disability insurance (SSDI) benefits depends on whether you have other income. SSDI benefits are definitely subject to tax, but if you (and/or your spouse) have less than a certain amount of income, the federal government won't tax them at all.

If you receive between $2,084 and $2,833 per month, counting all income, or between $2,667 and $3,666 if you're married, then half of your Social Security disability benefits will be taxed. If you earn more than that, most of your SSDI benefits will be taxed. See our article on Social Security disability taxation for the monthly income break points to see whether you can expect to pay taxes, and how much.

If you'll collect disability benefits through the SSI program, these benefits won't be taxed at all.

State Taxation of Federal Benefits

Another wrinkle: Whether or not the federal government will tax you on your Social Security disability benefits, your state may tax your Social Security benefits. Most states don't tax Social Security disability, but some do. Read our partner's article on state taxation of disability benefits to see which category your state falls into.

_{Updated May 3, 2023}