The majority of people don't pay taxes on the Social Security disability benefits they receive. This usually is true for people who have income in addition to disability benefits as well as those who don't.
Breaking this down a bit, about one-third of recipients of Social Security disability insurance (SSDI) benefits have to pay taxes. Recipients of Supplemental Security Income (SSI) don't have to pay federal taxes on their benefits, because SSI is not taxable.
Those who do have to pay federal taxes on their SSDI benefits generally owe taxes on part of their benefits because they have another source of substantial income, or their spouse does. Below, we'll go into detail on how this 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 up to half the value of your Social Security benefits. If you're married and you file your taxes jointly, you can have a combined income of up to $32,000 before having to pay taxes on up to half of your benefits.
If your income is higher, you'll have to pay taxes on a bigger portion of your benefits. If you're single and you make more than $34,000 (or married and make more than $44,000), up to 85% of your benefits could be taxed.
This doesn't mean you'll pay 50% or 85% of your benefits in taxes. It just means that 50% of your benefits, or 15% of your benefits if you're in the higher income bracket, is not subject to taxation at all.
If part of your disability benefits is subject to taxation (because your income is higher than the limits listed above), your disability benefits will be taxed at your personal income tax rate. For example, if your income is fairly low, you would probably pay taxes of about 10% on 50% of your benefits, assuming your tax rate is 10-12%. People with higher income might pay taxes of 22-24% on 85% of their benefits.
Estimating the federal tax on Social Security disability benefits is pretty complicated. The IRS has a tax estimator you can try here.
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 information on whether your state taxes Social Security, see our article on which states tax disability benefits.
SSI backpay is not federally taxable. SSDI is a different story.
If you receive a lump-sum payment for retroactive benefits and/or back payments of SSDI, 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. This could amount to a big tax bill.
Luckily, if part of your backpay was for monthly benefits from an earlier tax year, you should 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.
If you do owe taxes on your benefits, the easiest way to pay the taxes is when you receive your benefits. You can ask the Social Security Administration to withhold federal taxes from each of your monthly payments. Or, if you or your spouse has self-employment income, you may want to make quarterly estimated tax payments.
On IRS Form 1040, you report the amount of your Social Security benefits on line 6a. You report the taxable amount of your benefits on line 6b. To calculate this amount, use the IRS's interactive tax assistant.
Updated January 13, 2021