Are Social Security disability benefits taxable? Keep reading for the answers to some questions regarding Social Security disability benefits and how much in taxes one may owe based on these benefits.
In this article:
- What Are Social Security Disability Benefits?
- How Do You Get Social Security Disability Benefits?
- Is Disability Income Taxable by the IRS?
- What Are the States That Tax Social Security Disability Benefits?
- Will Dependents Pay Taxes on Social Security Benefits?
- Is Social Security Back Pay Taxable?
- How Do You Minimize Social Security Taxes?
Are My Social Security Disability Benefits Taxable?
What Are Social Security Disability Benefits?
In 1935, the Social Security Administration (SSA) spearheaded a program that gives people with disabilities, as well as the elderly, assistance to meet their basic needs. There are two kinds of disability benefits under Social Security:
- Supplemental Security Income (SSI): Benefits given to those who have limited income and whose disabilities severely impair their ability to work and pay into the system
- Social Security Disability Income (SSDI): Benefits given based on how much the account owner has paid into the Social Security system
How Do You Get Social Security Disability Benefits?
To get disability benefits via SSDI and SSI, one has to fulfill a stringent set of criteria. Here are the Social Security disability requirements:
- You must have a disability that adversely affects how you do basic tasks like walking, lifting, and remembering things for at least 12 months.
- This disability should prevent you from working in any kind of career.
- Your disability falls under the Social Security Administration’s list of approved disabilities, or any other disability of equal disability to any item on the list.
- Only for SSI — You must make under $1,220 a month (or $2,040/month if you receive SSI due to visual impairment).
- Only for SSDI — You have a certain amount of work credits upon claiming. This depends on your current age versus the age when the disability started.
The SSA defines disability as an impairment to a person’s ability to work or do basic tasks that:
- Has lasted or is expected to last for at least 12 months, or
- Is expected to lead to death
If you’re a person with a disability who performs work for profit, Social Security considers these activities and could disqualify you from getting SSI benefits. The only time Social Security doesn’t take income and work history into account is when the disability is due to visual impairment.
SSA reviews everyone’s income every year. If you’re earning more than the maximum threshold of $1,220 a month, you could lose your benefits.
This also applies if you get married as the SSA also takes your spouse’s income into account. If your spouse earns more than the threshold, you can also lose your disability benefits.
Is Disability Income Taxable by the IRS?
How much taxes you owe from these disability benefits depends on how much you earn.
- You won’t have to pay taxes if your total annual income is below $25,000 if you’re single, or $32,000 if you’re filing jointly as a married couple.
- If you earn between $32,000 and $44,000 a year, expect taxes on 50% of your income.
- If you earn more than $2,834 a month (or more than $3,667 for married couples), you could owe taxes on as much as 85% of your income.
However, since you need to earn less than a certain amount to even get benefits in the first place, most people with disabilities on benefits don’t have to worry about exceeding the tax threshold.
What Are the States That Tax Social Security Disability Benefits?
Whether or not you owe state taxes on your Social Security benefits depends on which state you live in. Most states don’t tax Social Security benefits, but some states do tax them in one way or another:
- Full Taxation on SSDI: Montana, New Mexico, Utah
- Taxation based on Adjusted Gross Income (AGI): Colorado, Connecticut, Missouri, Kansas
- Taxation based on Federal Tax Rate: Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, West Virginia
What is Adjusted Gross Income (AGI)? This refers to gross income minus allowed deductions like business expenses, alimony, and retirement contributions.
Some states like California and Pennsylvania impose state income taxes, but exempt SSDI from their tax computations. Others like Florida and Washington don’t impose income taxes on the state level at all.
Will Dependents Pay Taxes on Social Security Benefits?
You won’t be pay taxes on any benefits your dependents may receive. This is regardless of whether the SSA will deposit the benefits to your account or theirs.
Your dependents will, however, pay taxes on these benefits based on the federal tax laws and will be reported on their tax return.
Is Social Security Back Pay Taxable?
What is back pay? These are withheld disability benefit payments due to delays in processing claims. The SSA then pays them to you in a lump sum.
Back pay can technically cost you more taxes than you should pay due to the artificial spike in income. To counter this, the SSA allows you to declare part of your back pay as income from the previous years without the need to amend your tax returns.
If, by any chance, your income plus back pay is over the threshold, the IRS gives the option to declare these benefits for the year you should’ve gotten them.
How Do You Minimize Social Security Taxes?
Here are some strategies you can take to minimize the tax you have to pay on your benefits.
- Stay below the income thresholds as much as possible. This minimizes your tax burden while ensuring you’ll still receive benefits.
- Seek the help of a lawyer or accountant to learn how to minimize taxes on your backpay.
- Invest for your retirement in a Roth IRA account. Deposits done after age 59 ½ in a five-year-old or older Roth IRA account aren’t taxable.
Are Social Security disability benefits taxable? Yes, and how much taxes you owe depends on your state of residence, your income, and even marital status.
Disability benefits are one of the few ways people with disabilities can get money for their care and basic needs. However, not knowing how much taxes you owe for your benefits can cut through your budget.
With the right information and planning, you can minimize the amount of taxes you owe for Social Security and get the full benefits.
Have you had to pay taxes on your disability benefits? How was the process like to claim disability in your state? Share your experiences in the comments section below.
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