Are Social Security Disability Benefits Taxable?

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Question:

If I am awarded Social Security disability benefits, will I have to pay taxes on the money I get? What about on the backpay I should receive for the monthly benefits I miss while my application is being processed?

Answer:

For the majority of people, Social Security Disability benefits are not taxable. This is true for people who have income in addition to disability benefits as well as those who do not. (Most of the one-third of disability recipients who do pay taxes on benefits receive SSDI benefits, not SSI. SSI recipients rarely have to pay taxes, because if they had enough income to be taxed, they wouldn't qualify for SSI.)

If you or your spouse have another source of substantial income, it's likely your SSDI benefits could be taxed by the federal government. Here's how it works. If you file your taxes as an individual, and your income is more than $25,000 per year but less than $34,000, you would have to pay taxes on about half the value of your benefits. If you are married and you file jointly, you can have a combined income of up to $32,000 before having to pay taxes on half your benefits.

If you are single and you make more than $34,000 (or married and make more than $44,000), 85% of your benefits could be taxed. 

If your disability benefits are subject to taxation because your income is above these limits, your disability benefits would be taxed at your marginal tax rate. In other words, you would not pay taxes of 50% or 85% of your benefits, you would probably pay taxes of about 10-15% on 50%-85% of your benefits. Higher income people might pay taxes of 33-35% on 85% of their benefits.

As to state taxes, most states don't tax disability benefits at all, but a few states tax them in the same way as the federal government, and still other states have their own way of applying state taxes to disability benefits. For more information, see our article on which states tax disability benefits

If you receive a lump-sum payment for retroactive benefits and/or back payments, you may have to pay taxes on this amount all in one year, and your tax rate might be higher than usual because of receiving the lump sum. But if part of your backpay was for monthly benefits from an earlier tax year, you may be able to apply the income to an earlier year, if it would lower your tax bill. (For the details, read our article on how Social Security disability backpay is taxed.) If this is your situation, you should contact a CPA or an attorney who is familiar with tax law and Social Security Disability, as it's fairly complicated.

by: , J.D.

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