In the U.S., you can join Social Security programs if you work long enough, file taxes, and meet a particular income threshold during your career. You contribute to this system over time and may anticipate receiving various benefits for you and your family.
The Social Security Disability Insurance (SSDI) program comes in handy when you, as a career person, develop a disability and have scarce resources and lesser means to generate income.
The program offers benefits to both you and your kids. But given that your taxes fund it, you may ask, “is Social Security disability income taxable? Let us investigate.
What Is Social Security Disability Insurance?
Social Security Disability Insurance (SSDI) is a social insurance program financed by payroll taxes meant to support individuals when they become disabled.
The Social Security Administration (SSA) manages the program, which allows you to receive coverage benefits if you meet their disability criteria and cannot work for more than a year.
The program offers modest but essential benefits if you have a severe and long-term medical condition that satisfies Social Security’s definition of disability. So, if you meet the prerequisites, you may be eligible to receive benefits.
Who Is Eligible for Social Security Disability Insurance?
Apart from having a disability, as mentioned above, you must have worked for a sufficient period and have worked in jobs covered by Social Security, to be eligible for SSDI.
The first requirement is to pass the work credit test. You must meet a minimum annual wage or self-employment income requirement to pass this test per Social Security work credits.
Generally, you earn one credit for every $1,640 salary or self-employment proceeds you make annually. One can earn up to four credits each year.
You get four credits if you have earned $6,560 in that year. You typically require at least 40 credits, 20 of which must have been acquired in the previous ten years, including the year of your disability.
Age may also determine whether you pass the work test requirement. The number of credits required varies, considering younger workers have spent less time in employment to accumulate 40 Social Security credits.
- Under 24 years: You are eligible if you earned six credits within the three years when your disability occurred or started.
- 24 to 31 years: You may be eligible if you have credits equal to working for half the duration between the ages of 21 and being disabled.
- 31 years and above: You must have earned a minimum of 20 credits ten years before your disability.
Second, check the SSA table to determine if you meet the work test duration based on age and when your disability started.
Next, the medical condition that prevents you from working must have lasted a year, is predicted to continue more than a year, or result in death. That means you must meet the SSA’s definition of disability, not just having a partial disability.
Lastly, you must be below the retirement age defined by Social Security. If you meet these criteria and qualify for SSDI, some of your family members may receive benefits based on your employment history.
What Benefits Does Social Security Disability Insurance Offer?
Your average lifetime income before the onset of your disability determines how much you will get from SSDI. Generally, the longer you worked and earned more, the more your benefits will be, up to the maximum limit.
The SSA uses your Social Security “covered earnings” to calculate your disability benefit. These are typically your past earnings that were subject to Social Security tax.
It averages your covered earnings over 35 years to determine your benefits, representing your highest earning years. The SSA considers this your average indexed monthly earnings (AIME).
It then uses a formula on your AIME to establish your primary insurance amount (PIA). This will serve as the base figure for the SSA’s computation of your SSDI payout. The SSA makes your yearly Social Security Statement accessible so you can understand your whole history of covered earnings.
Remember that getting additional disability benefits from insurance companies does not affect your SSDI benefits.
However, your eligibility for SSDI benefits may be impacted if you receive benefits from other government-sponsored programs, such as workers’ compensation or a temporary state disability program.
In contrast, Supplemental Security Income (SSI) and Veterans Affairs (VA) will not affect your SSDI benefits. But receiving SSDI can reduce your SSI benefits.
SSDI program regulations may limit your overall benefit in some cases. On average, the total sum you get from SSDI, and other federal disability programs cannot exceed 80% of your pre-disability earnings. The SSA will lower your compensation if this happens.
Is Social Security Disability Income Taxable?
So, is Social Security Disability income taxable? This is a crucial question if you a beneficiary of Social Security disability benefits. But the short answer is that it depends.
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Although these benefits are taxable, most individuals do not wind up paying a tax on them. But if you or your spouse receives income from another source besides your Social Security disability benefits, you may be required to pay taxes on those benefits.
The good news is that your Social Security disability benefits are not taxed until you hit certain thresholds. So, if the benefits are the only source of revenue, you probably should not be worried.
You only owe tax on the benefits if your yearly income exceeds $25,000 as a single person or $32,000 as a married couple.
When Is Social Security Disability Taxable?
According to the Internal Revenue Service (IRS), SSDI benefits might be subject to taxation if the total of your other income plus one-half of your benefits exceeds a predetermined threshold based on your tax filing status.
Even if you can no longer work because of your disability, you must report other unearned income, such as tax-exempt interest and dividends.
If married and you file a joint return, you must include your spouse’s income to know whether any of your SSD benefits are taxable. This applies even if your spouse is not getting any Social Security benefits.
The IRS sets the following limits as the taxation threshold for Social Security disability benefits:
- $25,000 if you are single, head of the family, or an eligible widow(er)
- $25,000 if married, filing independently, and living away from your spouse during the tax year
- $32,000 if married and filing jointly
- $0 if married, filing independently, and living with your spouse during the tax year
So, if you are married and file a joint return, you may report a combined income of $32,000 and above before paying taxes on Social Security disability benefits. The IRS may impose one of two alternative tax rates based on your filing status and your reported income.
You would pay taxes on the following if you are single and file individual returns:
- Up to 50% of your benefits if you earn between $25,000 and $34,000 in income
- Up to 85% of your benefits if you earn above $34,000
You will pay taxes on the following if you and your spouse file a joint return:
- Up to 50% of your benefits if your total income ranges from $32,000 to $44,000
- Up to 85% of your benefits if your total income exceeds $44,000
In other words, the more your income as an individual or married couple, the higher the chances of paying taxes on your Social Security disability benefits.
The IRS uses your marginal tax rate to determine the actual tax rate for these benefits. Therefore, instead of paying a 50% or 85% tax rate, you would pay your regular income tax rate, which is determined by the tax bracket into which you fall.
It is also crucial to keep in mind that receiving Social Security disability back payments may temporarily push you into a higher tax rate. You may get these back payments in a lump sum to pay for the time you were disabled but awaiting the verdict of your benefits claim.
The good news is that you can spread your tax burden by retrospectively applying some of those benefits to tax returns from prior years. You must file an amendment return to do so.
Is Social Security Disability Taxable at the State Level?
In addition to federal income taxes on Social Security disability benefits, you can also owe state taxes. As of 2022, 12 states imposed taxation on Social Security disability. The 12 states that may occasionally tax your disability benefits include:
- New Mexico
- Rhode Island
- West Virginia
Each state levies the tax differently. Utah and Nebraska, for example, follow federal tax regulations.
But other states permit exemptions or exclusions, while West Virginia intended to gradually abolish the taxation of Social Security income by the end of 2022.
It might be helpful to acquaint yourself with the local tax laws if you’re worried about how much in-state taxes on Social Security income you could be required to pay.
How to Report Social Security Disability Benefits Taxes
You should report any Social Security disability benefits you may have received in Box 5 of Form SSA-1099, Social Security Benefit Statement.
You must enter the amount in Box 5 on Line 5a of Form 1040 or Form 1040-SR, whichever you file. Your Social Security disability benefits taxable component appears on line 5b of either form.
Getting Help with Your Social Security Disability Benefits
Social Security disability benefits are subject to taxation. But if your income is below the set threshold, you may not have to pay taxes on them.
Speaking with a Social Security Disability attorney might be helpful if you don’t understand how earning disability benefits while disclosing other income can influence your tax liability.
An SSD attorney can help you with the application process and devise solutions to reduce the total amount of taxes you’ll have to pay.