Albert Einstein once said that “[t]he hardest thing in the world to understand is the Income Tax.”  Most Americans would probably agree.  Most social security disability recipients have been modest wage employees without complex income tax issues so they face an unfamiliar income tax issue in how the Internal Revenue Service will treat their social security disability payments.  Social Security Disability tax is the same as the tax on social security retirement benefits.  Albert Einstein’s comment notwithstanding, the income tax implications of becoming a social security disability recipient does not have to be difficult to understand.

Most Social Security Disability Recipients Do Not have A Tax Issue

If your only income is from Social Security disability, your benefits likely aren’t taxable. The average SSDI benefit payment is $1,198.54.   But if you have other sources of income, or are married with a working spouse, you will need to determine what portion, if any, of your disability benefits will be taxable. 

First determine what your “Provisional Income” (in IRS-speak) by adding all adjusted income (other than your social security disability benefits) and half of your Social Security benefits.  Once you have calculated your “Provisional Income” you must consult the below table based upon your filing status:

  • If Married filing jointly, your Provisional Income must equal or exceed $32,000.
  • If Single, head of household, qualifying widow(er), married filing separately and you lived apart from your spouse for all of the earlier year, your Provisional Income must equal or exceed $25,000.

For married social security disability recipients filing separately and living together there is no “base amount”: all social security disability receipts are taxable.  In this case, 85 percent of your disability benefits would be taxable, even if you earned no other income. This rule may seem harsh, but it is designed to stop married taxpayers from evading taxes they would otherwise have to pay if they also had to account for income from a spouse.  

Even if Your Disability Benefits are Taxable, they are not “fully taxable”

The fact that your Provisional Income exceeds either $32,000 or $25,000 does not mean, however, that all your social security disability benefits are subject to taxation.  The amount of your social security benefits subject to tax would either be 50% of 85% as determined below:

Filing Status “Provisional Income”  Percent of social security disability subject to taxation
Married filing jointly Between $32,000 and $44,000 50% of social security disability benefit is taxable
Married filing jointly Over $44,000 85% of social security disability benefit is taxable
Single or married filing separately and living apart  Between $25,000 and $34,000 50% of social security disability benefit is taxable
Single or married filing separately and living apart Over $34,000 85% of social security disability benefit is taxable

It is important to not misread the above table, and the 50% and 85% amounts set out.  This is NOT the tax rate – it is the percent of the social security disability benefit that is subject to taxation.

State Taxation

Depending on your state of residence, you may face taxation of social security disability benefits under state law.  The majority of states, however, exclude social security disability benefits from taxation. Illinois is such a state.

Social Security Disability “Back Pay” Taxation Issues 

Most Americans are familiar with the long waiting time in securing social security disability benefits.  For many, once the case is finally approved the social security administration owes the claimant “back pay” for several years.  Claimants receive a large back pay check representing disability benefits for several years.  Yet if that amount was considered income in the year of receipt, the claimant may have a tax liability they would not have had if the back benefits check had been allocated to the past tax years represented by the payment. 

If treating the back pay check as income for the year of receipt pushes “provisional income” over $25,000 for the single taxpayer or over $32,000 for the married taxpayer, it is worth exploring whether using the so-called lump sum election would “breaking up” the lump sum amount is that such treatment could keep you under the $32,000 or $25,000 taxation thresholds we have discussed above.  Am example may be helpful:

For example, if Freddy Farkle received $40,000 retroactive social security benefits check on 1/2/2018 based upon social security finding he became disability on 7/2/2014.  This check represents payment for the time period of 1/2015 (there is a 5-month disability waiting period) to 12/2018.  There this $40,000 check represents payment for 4 years: 2015, 2016, 2017, and 2018.  Using the Lump Sum method above $10,000 would be allocated to each of these years.

 Deductions for the Costs of Security Social Security Disability

Social Security Disability recipients can deduct expenses incurred in security their social security disability benefits.  If you paid an attorney fee, unfortunately the amount of the attorney fee will not be excluded from the calculation of “provisional income” discussed above.  However, the attorney fee would be an income tax deduction.  See Publication 529 (2018), Miscellaneous Deductions. 

Long-Term Disability Benefits and Social Security Disability Tax Issues

Social Security Disability recipients often are also getting long term disability benefits under either an individual or employer provided Long Term (LTD) disability plan.  Many of these plans, especially those provided by employers, impose an “offset” of the benefit they pay in the amount of the social security disability benefits.  Because social security disability recipients on LTD plans often wait for years for their social security disability, they are required to pay the LTD plan back once they get their retroactive disability check.  

Tax issues can arise if the LTD benefit were not taxable but the social security disability benefit were taxable.  This is a situation where the Lump Sum strategy discussed above is particularly important to consider.  

Earned Income Credit for Social Security Disability Recipients

The Earning Income Credit is available to all tax payers. Disabled taxpayers may also claim the earned income credit, but they must have “earned income”.  Unfortunately, social security disability benefits are not considered “earned income”. The Earned Income Credit would be mostly likely to apply where the social security disability recipient’s spouse works.

Tax Credits

The Senior Tax Credit for the Elderly and Disabled is also available to social security disability recipients but their income must be very low.  Income over $17,500 for a single filer and, $25,000 for a married person filing jointly will eliminate qualification for this tax credit.

Income tax issues for social security disability recipients can feel like just one more headache, and there are situations where it can become complicated quickly. Claimants are well advised to secure competence tax assistance such as a Certified Public Accountant or a tax attorney when transitioning from a work life to social security disability.

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