Are Social Security Disability Benefits Taxable?

Most people don't pay taxes on their disabillity benefits.

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 effectively not taxable. This is true for people who have income in addition to disability benefits as well as those who do not. Breaking this down a bit, about one-third of recipients of SSDI benefits pay taxes, but SSI recipients rarely have to pay taxes, because if they had enough income to be taxed, they wouldn't qualify for SSI.

Those who do have to pay federally taxes on SSDI benefits generally have another source of substantial income, or their spouse does. Here's how it works.

How much of your benefits are taxed? 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.

At what rate are your benefits taxed? If your disability benefits are subject to taxation because your income is higher than the limits listed above, 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 10-12% on 50%-85% of your benefits, assuming your tax rate is 10-12%. Higher income people might pay taxes of 22-24% on 85% of their benefits.

What about 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.

What about backpay? If you receive a lump-sum payment for retroactive benefits and/or back payments, you could have to pay taxes on this amount all in one year, and your tax rate might be higher than usual because of receiving the large lump sum. Luckily, if part of your backpay was for monthly benefits from an earlier tax year, you might 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.

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