Is Social Security Disability Taxable?

Sometimes Social Security disability benefits are not the only income you have. Some persons who qualify for disability benefits still work part-time, receive dividends and interest, or are self-employed. These residual income streams could mean that they might be subject to paying tax on the benefits they receive from the Social Security Disability Insurance program.

Tax on disability income depends on the type of social security disability benefits you receive and is calculated on your total taxable income. This includes your personal income level if you file a tax return as an individual and the combined income if you file joint taxes with your spouse.

Is SSDI subject to tax?

In some cases, you may need to pay tax on any benefits you receive from the Social Security Disability Insurance program. Benefits received from the SSDI must adhere to the same tax rules as Social Security retirement, family, and survivor benefits.

To establish whether you need to pay tax on your Social Security Disability Insurance benefits, the Internal Revenue Service looks at your “provisional income.” This income is the sum made up of the following:

·         Your gross income level (how much you earn before any taxes or deductions come off),

·         all other income, including tax-exempt interest, and

·         half of the Social Security disability benefits you receive each year.

Some states tax SSDI benefits. Remember to check whether your disability benefits are subject to State income tax in your area.

How much of my SSDI is taxable?

You won’t have to pay tax on your Social Security Disability Insurance benefits if your total provisional income comes to $25,000 per year for an individual, someone who is the head of a household, or a qualified widow(er). The same amount applies to a married individual who files separate from their spouse and who has lived apart from their spouse for the entire year.

A married couple filing a joint tax return with a provisional income amount of $32,000 or less does not have to pay tax on their benefits. Suppose a married couple files separately and has lived together at any time during the tax year. In that case, the base amount for their filing status is $0.

Up 250% of your SSDI benefits could be taxed if you are an individual and your provisional income is between $25,000 and $34,000. For couples filing a joint tax return, this amount is between $32,000 and $44,000.

In cases where your provisional income as an individual is more than $34,000 or a couple is more than $44,000, you could be taxed on anything between 50 and 85% of your benefits.

Suppose a couple files a joint tax return. In that case, both individuals’ incomes and Social Security benefits should be combined to calculate what percentage of Social Security benefits might be taxable. You should do this even if only one of you receives benefits.

How can the government tax my financial aid?

Financial aid like Social Security Disability Insurance is seen as income, and therefore you might need to pay tax on at least a part of the benefits received through a financial aid program. Supplemental Security Income (SSI), on the other hand, is not taxable.

When you first apply for Social Security benefits, you could choose to have federal taxes withheld from the benefit payment you receive each month. You can choose which percentage is withheld (7, 10, 12, or 22 percent) for federal income tax by completing form W-4V, Voluntary Withholding Request.

When you choose a percentage to be withheld, exactly that percentage of your benefits will be withheld, not a flat dollar amount.

How can I avoid paying tax on my Social Security?

You may be wondering: Can I avoid paying SSDI tax? Yes, but it might not always be achievable.

One of the easiest ways to avoid paying tax on your Social Security Disability Insurance benefits is to keep your total income below the thresholds where you will be required to pay tax. This might not always be possible.

Suppose you are getting ready to claim retirement benefits. In that case, you can lower the taxes you may need to pay by using Roth Accounts for part of your retirement income. A Roth account is a retirement account into which you can pay after-tax dollars (money that has already been taxed). Money withdrawn from a Roth IRA or Roth 401(k) account cannot be taxed (because you already paid tax on that money). To avoid paying tax on these withdrawals, you need to have had the account for five years or longer and be at least 59.5 years of age.

Any Roth payout will not be included in your provisional income when calculating how much tax you need to pay on your Social Security Disability Insurance. On the other hand, money taken from a traditional IRA or 401(k) plan will be subjected to tax.

Any other tips or things to keep in mind

The goal should not be to pay as little tax as possible. Instead, focus on maximizing the amount of money you get out after tax (including the amount of Social Security income you get). For example, you can maximize your Social Security benefits. Pursue every avenue and option and check your eligibility for various financial aid programs, not just the Social Security Disability Insurance program.

How can Benefits.com help me?

Benefits.com helps people with disabilities find essential info about the financial aid they qualify might for. We focus on serving underserved and at-risk disabled individuals. Our goal is to help the Benefits.com community have access to the resources they need to get the benefits they deserve. 

Suppose you earn more than the threshold amount in total (including half of your disability income, your gross income, and any other income). In that case, you will likely have to pay tax on at least a part of your Social Security Disability Insurance. The only way to completely avoid paying tax on your Social Security benefits is to earn less than the threshold amount.

Instead of focusing on minimizing the amount of tax you need to pay on your Social Security benefits, focus on increasing the amount of benefits you receive. If you have questions on Social Security Disability benefits. please contact us today.