When you are working, income tax is pretty straightforward. Your employer sets aside money for taxes from each of your paychecks, and then at the end of the year, provides you with W-2 statement showing how much money you made, and how much was deducted for taxes. However, for those who are collecting Social Security disability payments, taxes are not quite as simple, but they don’t have to be a financial mess either. Here are some basic guidelines to help you understand how your disability payments are taxed, and some ideas on how to reduce your tax liability.
The Social Security Administration will provide you with a form SSA-1099 every year, which will tell you how much money you received in Social Security Disability benefits. The SSA-1099 will provide you with the information you need to file your income tax return.
H&R Block, the national tax preparation company, points out that “all Social Security benefits are taxed in the same way. This is true whether they’re retirement, survivors, or disability benefits.” But the majority of disability recipients don’t owe any taxes because they have little or no additional income. According to Social Security, “some people who get Social Security have to pay taxes on their benefits. About one-third of…current beneficiaries pay taxes on their benefits.”
Typically, disability recipients who pay taxes on benefits are those receiving Social Security Disability Insurance (SSDI) payments. Supplemental Security Income recipients seldom pay income taxes, because if they have sufficient income to have to pay taxes, they don’t qualify for SSI.
So when do you have to pay taxes on SSDI benefits? In general, if you or your spouse has another source of substantial income, you will owe money to the tax man.
According to H&R Block, none of your SSDI is taxable if one-half of your SSDI plus all your other income is less than:
Up to 50% of your SSDI is taxable if your income is more than those amounts.
Also, up to 85% of your SSDI is taxable if one-half of your SSDI plus all your other income is more than:
If you are married and file a separate return, and you and your spouse lived together at any time during the year, you will probably owe taxes on your benefits.
While most states levy a state income tax on Social Security benefits, Illinois does not— even if the person receiving them is under 65 years old.
You may be wondering if you qualify for tax refund under the Earned Income Tax Credit (EITC), a refundable tax credit for low-to-moderate-income working individuals and couples, particularly those with children. The IRS says, no. “Benefits such as Social Security Disability Insurance, SSI, or military disability pensions are not considered earned income and cannot be used to claim the EITC. You may qualify for the credit only if you, or your spouse, if filing a joint return, have other earned income.”
If you received a lump sum payment of disability benefits in 2017, you can lower the amount of taxes owed by spreading them out. The IRS allows you to spread the taxes on lump sum benefits over the previous tax years to which the benefits apply. You can do this on your current year return and do not have to file amended returns.
Social Security disability attorney fees are tax deductible in some cases. The National Organization of Social Security Claimants Representatives (NOSSCR) says, “If a taxpayer discovers that some of the Social Security lump sum–when added to regular benefits received in the same year–turns out to be taxable, the attorney fee may be deducted from income, but only to the same extent that Social Security is taxed.” But to take this deduction, you must file an itemized return and this limited deduction is subject to the 2% of adjusted gross income ceiling on miscellaneous itemized deductions.
If you end up owing money to the taxman, you may want to request that the SSA withhold taxes. The SSA is not required to withhold taxes from your Social Security Disability payments, so you will need to contact your local Social Security office to make these arrangements.
Please note that this article gives general income tax guidance, but should not be used as tax advice in individual cases. You should always seek guidance from a competent tax professional.