Receiving Social Security Disability Insurance (SSDI) benefits can raise important questions about taxes, especially for individuals who are newly navigating a change in income due to disability. If you are hoping to file for SSDI benefits, or you are a new recipient of these benefits, it’s important to understand that SSDI can potentially affect your tax liability, depending on your total household income and filing status.
In many cases, SSDI benefits are not taxed at all. The key factor that the government considers is the amount of combined income you have in a given year. The Social Security Administration (SSA) defines combined income as your adjusted gross income, any non-taxable interest you receive and half of your SSDI benefits. If your combined income is below a certain threshold, your SSDI payments will not be subject to federal income taxes.
What does this mean, practically speaking?
For individuals filing as single, SSDI benefits are generally non-taxable if your combined income is less than $25,000. If you file jointly with a spouse, the threshold increases to $32,000. However, if your combined income falls between $25,000 and $34,000 (or $32,000 and $44,000 for joint filers), up to 50 percent of your SSDI benefits may be taxed. If your combined income exceeds those ranges, as much as 85 percent of your benefits could become taxable.
It is important to note that even if a portion of your benefits is taxable, you will not be taxed on the full amount. Only the calculated percentage of your benefits is included in your taxable income. For example, if your annual SSDI benefits total $12,000 and 50 percent is taxable, only $6,000 would be added to your other income when determining your total tax bill.
Back payments for SSDI benefits can complicate tax liability. When benefits are approved retroactively, the lump sum you receive may push you into a higher tax bracket for that year. However, the IRS allows you to allocate that income to the years it was owed, which may reduce the tax impact. State taxes are another consideration. While most states do not tax SSDI benefits, a few have their own rules, and you may need to confirm how your state treats these payments.
If you are currently receiving other types of income, such as workers’ compensation, long-term disability payments or part-time wages, your tax liability may be higher since these sources are often taxable. Proper planning and legal support can help you avoid surprises when tax season arrives.
