Here's how it works. If you're married and you file jointly, and you and your spouse have more than $32,000 per year in income (including half of your SSDI benefits), a portion of your SSDI benefits will be subject to tax.
If you're single and you have more than $25,000 in income per year (including half of your SSDI benefits), a portion of your SSDI benefits will be subject to tax.
How big a portion of your SSDI benefits is subject to tax depends on how high your income is. Here's a chart with monthly income amounts that tells you whether your SSDI benefits will be taxed and the maximum amount of SSDI that could be taxed.
If you have over $2,083 in income per month, calculating the actual amount of SSDI benefits that will be taxed can be quite complicated. You can make the calculations on the IRS Form 1040 tax return or you can use Social Security's tax calculator.
SSDI Taxes for Individuals |
||
Amount of Monthly Income |
Amount of Annual Income |
Maximum Portion of SSDI to Be Taxed |
0 - $2,083 |
0 - $25,000 |
0% |
$2,084 - $2,833 |
$25,000 - $34,000 |
50% |
$2,834 and up |
over $25,000 |
85% |
SSDI Taxes for Couples |
||
Amount of Monthly Income |
Amount of Annual Income |
Maximum Portion of SSDI to Be Taxed |
0 - $2,666 |
0 - $32,000 |
0% |
$2,667 - $3,666 |
$32,000 - $44,000 |
50% |
$3,667 and up |
over $44,000 |
85% |
Keep in mind that, if your disability benefits are subject to taxation, they'll be taxed at your personal income tax rate. In other words, your tax rate would not be 50% or 85% of your benefits; your tax rate would probably be more like 15-25% of your benefits.
Those with higher incomes (where 85% of your benefits would be taxed) might pay a tax of 28% on their benefits. The tax rate is the same used for your other personal income.
Large lump-sum payments of back payments of SSDI (payments of benefits for the months you were disabled but not yet approved for benefits) can bump your income up for the year in which you receive them, which can cause you to pay a bigger chunk of your backpay in taxes than you should have to.
To avoid losing part of your backpay this way, the IRS allows you to apply the SSDI benefits that Social Security owed from a prior year to prior tax returns, lowering your income for the year you actually receive the lump sum.
For example, if you were entitled to disability benefits for 22 months before you received your back pay, you could amend your tax returns for two prior years to claim some of the income in those years instead of the current year.
You should ask a lawyer or CPA for help if you want part of your back pay to count for a prior year; it's complicated. For more information, read our partner's article on how Social Security disability back pay is taxed.
Most states don't tax Social Security disability benefits. The following states, however, do tax disability benefits in some situations.
Some of these states use the same income brackets as the federal government (discussed above) to tax SSDI benefits, but most have their own systems. To find out how your state taxes SSDI benefits, see our sister website's article on state taxation of SSDI benefits.
Updated May 3, 2023
]]>If you’re eligible for temporary disability payments or permanent disability benefits through workers’ compensation, those benefits are generally tax-free at the state and federal level.
However, a portion of your workers’ comp benefits might be taxed if you’re also receiving Social Security Disability Insurance (SSDI) benefits, and part of those benefits have been offset by your workers’ comp benefits.
Here’s how the offset and the taxation works.
In many states, if you’re receiving benefits through both Social Security Disability Insurance (SSDI) and workers’ compensation, and those combined benefits are more than 80% of your average earnings before you became disabled, the SSDI benefits will be reduced (or “offset”). The offset doesn’t apply to Social Security retirement benefits.
Taxes may be an issue when there’s an offset, because a portion of any Social Security benefits are taxed when your total income reaches a certain level. So if your SSDI benefits are reduced because of the offset with workers’ comp benefits, the amount of the offset could be subject to taxes (even though you received that amount as workers’ compensation benefits rather than as SSDI benefits) if your earnings for that year are high enough. The logic behind this rule is that the offset amount could have been taxable if you had received it from Social Security rather than through workers’ comp.
For example, say you would have been entitled to $1,200 in SSDI benefits and $1,000 in disability benefits through workers’ comp, for a total of $2,200 per month. If your pre-injury earnings were $2,500 per month, the combined benefits would be more than 80% of that amount ($2,200/$2,500 = 88%).
That means that your SSDI would be reduced by $200 (to bring the combined benefits down to 80% of $2,500, or $2,000). In that case, $200 of your monthly workers’ comp benefits could be subject to tax if your total income is high enough. (See our article about taxes on Social Security benefits for details on income thresholds and what portion of those benefits may be taxed.)
In some states, the SSDI/workers’ comp offset reduces the benefits you receive from workers’ comp rather than your SSDI benefits. In that case, you aren’t taxed on any of your workers’ comp payments. (However, as discussed above, you will be taxed on a portion of your Social Security benefits if your combined income is high enough.)
The bottom line: Most people won't have to pay taxes on workers' comp benefits. Even if they do, the tax should only be on a small portion of those benefits. But it would be smart to speak with a lawyer if you’re concerned about the offset because you’re eligible for both SSDI and disability benefits through workers’ comp.
An attorney experienced in workers’ compensation or disability could save you money by helping you minimize how much workers' comp lowers Social Security benefits.
]]>I was finally approved for disability late last year and received a large lump sum payment from Social Security. But half of this money was for the tax year before last year. It makes it look like I had a high income last year. Am I going to have to give half my disability backpay away because of this? Can I amend the last year's tax return and claim half the disability income on that return instead?
Disability backpay can bump up your taxable income in the year you receive the lump sum payment from Social Security, which could cause you to pay more in taxes than you should have to. Technically, part of the backpay should have been paid to you last year or even the year before, so Social Security does allow you to attribute part of the backpayment to prior years, if you know how to do it.
First, know that many people won't owe taxes on their backpay at all because their income is so low. If you file your taxes individually and you received less than $25,000 in disability backpay and income during the year, you won't owe any taxes on your Social Security disability income. Likewise, if you file your taxes jointly (with your spouse) and you received less than $32,000 in backpay and income during the year, you won't owe any taxes on your disability income.
If your backpay and income are over these amounts, the IRS will allow you to allocate your past-due disability benefits to the year you should have received them, and you don't have to "amend" your prior year tax returns to do it. Social Security should have sent you a form called SSA-1099. It will state in Box 3 how much of your disability backpay was owed to you for each of the previous years you accrued back pay.
You'll still pay any taxes owed on these amounts with your current year's tax return, but you'll be able to figure out whether you owe taxes on each year's disability backpayments using the amount of backpay attributable to the prior years and your other income in those years. In prior years where your income, including the backpay attributable to that year, was below $25,000 (or $32,000 if you're married), you won't owe any taxes on the disability backpay. IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits describes this method in full and provides worksheets, but it can still be difficult to figure out how to do it. You may want to talk to a tax professional or use tax preparation software to make the calculations for you.
Note also that if you hired a disability attorney to help you win your Social Security benefits, you can deduct the cost of the attorney's fee so you don't have to pay taxes on this amount. For more information on this, see our article on the taxation of disability backpay.
]]>If you have or expect to receive a disability pension, it's important to understand how disability benefits are taxed. Most, but not all, disability pensions are taxable.
If you retired early on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You report your taxable disability payments as wages on Form 1040 until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. If you don't know your plan's minimum retirement age, check the plan documents or ask your employer. Since this pension income is considered employee wages, you pay income tax on it and your and you employer both pay Social Security and Medicare tax as well.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity and must be listed as such on your tax return. You must pay income tax on the payments, but not Social Security or Medicare tax. For more information on pensions and annuities, see IRS Publication 575, Pension and Annuity Income.
Accrued Leave Payments
If you retire on disability, any lump-sum payment you receive for accrued annual leave is a wage payment. The payment is not a disability payment. Include it in your wage income in the tax year you receive it.
Military and Government Disability Pensions
You do not have to pay income tax on certain military and government disability pensions.
VA Disability Benefits.You need not pay income tax on disability benefits you receive from the Department of Veterans Affairs (VA). Don't include such payments in your gross income on your tax return. These VA benefits include:
Other Nontaxable Disability Payments
Other disability-related payments that are not taxable include:
Tax Credit for the Disabled
If you were permanently and totally disabled when you retired and are receiving taxable disability income or are over 65, you may be entitled to a tax credit ranging from $3,750 to $7,500. However, your income must be quite low to qualify—for example, a married couple can have no more than $25,000 in adjusted gross income to get the credit. The IRS has an online tool you can use to see if you qualify. For detailed information on this credit, see IRS Publication 524, Credit for the Elderly or the Disabled. Also,
For information on Social Security disability benefits, see Nolo's article on when SSDI is 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?
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.
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.
The federal government doesn't tax:
But since employers in the following states pay for part of the benefit, the federal government will partially tax:
So, just because your state doesn't tax your short-term disability benefits doesn't mean the federal government won't.
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.
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
]]>You are disabled if you have:
Major tax benefits for the disabled include:
If you are legally blind, you may be entitled to a higher standard deduction on your tax return. The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. For details, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Military service-connected disability payments are not taxable. However, if you receive a disability pension based on years of service, in most cases you must include it in your income.
Other disability-related payments that are not taxable include:
See IRS Publication 525, Taxable and Nontaxable Income.
Also, most of an individual's Social Security disability benefits are not taxed. For more information, see Nolo's article on the taxation of Social Security disability benefits.
If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. These are expenses for care and other disability-related services at your place of work or outside of your workplace that are also needed for you to do your work. For example, a blind person could deduct the cost of employing a reader for work and a deaf person could deduct the cost of a sign language interpreter used during work meetings.
If you qualify for this deduction, your impairment-related work expenses are not subject to the 7.5% of adjusted gross income limit that applies when you deduct medical expenses as a personal itemized deduction.
See IRS Publication 529, Miscellaneous Deductions.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. This credit is for lower income individuals--for example, a single disabled person does not qualify if his or her adjusted gross income exceeds $17,500. For information on this credit, see IRS Publication 524, Credit for the Elderly or the Disabled.
Disabled people who itemize their deductions can deduct their medical expenses as a personal itemized deduction. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance. However, this deduction is limited to the amount that such expenses exceed 7.5 % of adjusted gross income during 2017 and 2018, 10% of AGI during 2019 and later. See the Nolo article Deducting Medical Expenses.
Disabled individuals who work but have low incomes may also qualify for the Earned Income Tax Credit. See the Nolo article The Earned Income Tax Credit: A Valuable Credit for Low Income Earners.
Since 2015, disabled individuals and their families have been allowed to establish a special tax-advantaged savings account: the ABLE Account (named for the Achieving a Better Life Experience). The accounts give disabled people the ability to save money to help pay for their expenses without jeopardizing their eligibility to receive government assistance. Disabled individuals or their families may establish a single ABLE account, and family and friends may contribute a total of $14,000 into the account each year. The Tax Cuts and Jobs Act increases the total amount that may be contributed to an ABLE account during 2018 through 2025. After the $14,000 annual limit is reached, the disabled individual may make an additional contribution equal to the lesser of:
For more details on ABLE accounts, see the Nolo article ABLE Bank Accounts for People with Special Needs.
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