The Social Security Administration (SSA) may grant you Social Security benefits through monthly payments if you have a disability. But what counts as income might be ambiguous regarding taxes.
So, is Social Security considered earned income? The answer is no – disability benefits are not classified as earned income.
But it is important to understand the distinction between earned and unearned income to understand how your benefits fit in during the tax period.
Things To Know About Disability Payments
Social Security disability benefits are monthly payments, usually in the form of direct deposits. Disability benefits are generally classified as income. However, the Internal Revenue Service (IRS) does not treat all income equally. The IRS differentiates two types of payments for tax purposes: earned and unearned income.
Earned income
Earned income is the cash you collect for working, either for an employer, independent contractor, or business owner.
Earned income includes salaries, wages, and tips. Union strike benefits and self-employment net income are indirect forms of revenue that are also regarded as earned income. Most earned income is taxable with just a few exceptions.
Unearned income
Unearned income is revenue you receive that was not earned via work. Examples of unearned income include:
- Social Security disability benefits
- Retirement income
- Interest and dividends
- Alimony
- Unemployment
- Child support
- Wages for work done while in prison.
When reporting it on your tax return, you must separate your unearned income from your earned income. Your tax form has various areas where you may indicate which income is earned and unearned.
Since Disability Benefits are Unearned Income, are They Taxed?
Your other sources of income, aside from disability payments, determine whether or not your Social Security disability benefits are taxable.
The IRS considers your benefits and income from taxable disability schemes, investments, and pensions.
In 2016, an individual could earn up to $25,000 per year, and a couple up to $32,000 per year without paying taxes on their disability benefits.
Does It Matter If my Benefits Come from SSI or SSDI?
Yes. If you are disabled and getting Supplemental Security Income (SSI) payments, you are already recognized as being within the low-income category. You will most likely not be taxed on ANY of your income.
Get Social Security Disability Insurance (SSDI) benefits and make a sizable amount of money from other sources. You may have to pay taxes on up to 50% of your SSDI payments.
That is logical since those who qualify for SSI benefits already have insufficient income to pay taxes, but SSDI payments are benefits with no income threshold.
Disability Benefits and the EITC
Earned Income Tax Credit (EITC) is a tax credit available to those with taxable incomes within a particular tax bracket.
It generally applies to low-income earning families and individuals. Whatever taxes you owe will be lowered if you are eligible for the EITC.
Since SSI benefits are not regarded as earned income, SSI beneficiaries are not eligible for the EITC. You must have put in time at work and earned an income to qualify for this tax credit.
However, an SSI recipient whose spouse works and earns taxable income can file a joint tax return and potentially be eligible for EITC.
A disabled child can also qualify for the EITC if they have a Social Security number and pass the other eligibility criteria the SSA sets.
Bottom Line
So, is Social Security considered earned income? The answer is no.
However, it might be hard to comprehend the IRS tax regulations and SSA standards independently.
Hiring a disability attorney would play a critical role in ensuring that you receive the benefits you qualify for and that the correct earned and unearned income amounts have been reported.
At Legal Giant, we partner with the best Social Security disability attorneys with years of experience assisting clients in obtaining the benefits they serve.
Contact us at 833-641-1650 to speak to one of our partner Social Security disability lawyers.
