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No Automatic Free Ride: Disability Income and Taxes

October 10, 2017

One of the great misconceptions we at Nash Disability Law run into all the time is the notion that Social Security disability benefits are automatically exempt from taxes. While we all would like for the burden of taxes to be lifted from our shoulders, disability beneficiaries may not be off the hook when it comes to taxes.

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.” 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 (SSI) recipients seldom pay income taxes, because if they have sufficient income to have to pay taxes, they don’t qualify for SSI.

“A dollar of Social Security benefits is never fully taxable,” Fortune magazine reports. “It can be exempt or either fifty cents or eight-five cents can be taxable. It depends on how much you received in the year and how much other taxable income you have.” 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:

  • $25,000 if you filed as single, head of household, or married filing separately and you and your spouse lived apart all year.
  • $32,000 if you’re married filing jointly.

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:

  • $34,000 if you filed as single, head of household, or married filing separately and you and your spouse lived apart all year.
  • $44,000 if you’re married filing jointly.

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.

State income tax levied on Social Security income varies from state to state. In Illinois and Indiana, 100% of Social Security benefits are exempt from a resident’s tax liability.

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.

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. For example, if a taxpayer paid 50% of SSA benefits received, the taxpayer may deduct half of the attorney fee paid or incurred in the same year.” 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.

(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.)