People with disabilities often have to face many challenges, including the question of whether or not their disability benefits are taxable.
Disability benefits can be a vital source of income for people with disabilities, but many people don’t know if these benefits are taxable.
Are Disability Benefits Taxable? Yes, disability benefits are taxable. That said, the government provides a tax break for people who receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). If you’re eligible for these programs and receive monthly payments from them, your benefits may be considered income-related expenses that don’t need to be included in your taxable income.
This article provides an overview of disability benefits and explains whether or not they are taxable.
Are Disability Benefits Taxable?
Disability income can be used to compensate a portion of your missed earnings if you are unable to work as a result of illness or injury. Depending on the type of disability benefits you receive, you may have to pay taxes on your earnings. Disability
Benefits are generally taxable, but not all disability income is subject to taxation. If you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), your monthly benefit may be considered an income-related expense that doesn’t need to be included in your taxable income.
If you have a disability and receive money through an accident or health insurance policy paid for by your employer, you must report it as income. You should go through one of these conditions
- If you and your employer have both paid the premiums for the plan, only the disability compensation that is owing to your employer’s payments is reported as income.
- Don’t include any amounts you receive for your disability as taxable income if you pay the entire cost of a health or accident insurance plan.
- If you pay health or accident insurance premiums through a cafeteria plan but don’t include the premium amount as taxable income to yourself, the premiums are considered paid by your employer, and the disability benefits are fully taxed.
If the amounts you receive fall under the taxable income, you should submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay to the insurance company. You can also make the estimated tax using Form 1040-ES, Estimated Tax for Individuals.
If you receive disability benefits in the form of a lump sum payment instead of monthly payments, you must include this amount in your total income. You may have to pay taxes on the entire amount or just the interest that has accrued each year.
The Social Security Act provides SSI supplemental security for people who are unable to work because of a disability and have limited resources and income. The SSI program is administered by the state, county, and local welfare offices and not the Internal Revenue Service (IRS).
If you’re receiving benefits from either SSDI or SSI, you may be considered exempt from paying taxes on your disability benefits if you meet certain requirements. If the income is considered to be related to a disability, it may not need to be included as taxable.
Calculating taxes on disability benefits
Calculating taxes on disability benefits can be complicated and confusing.
It’s difficult to tell what your tax liability is going to be, especially if you have a complex situation.
Read on below to find out how can you calculate the taxes on your disability benefits and learn about other deductions available specifically for those with disabilities!
The taxable portion of your benefits, which is included in your income and used to compute your income tax obligation, is determined by the total amount of money you earned and received during the year. You report the taxable component of your social security benefits on Form 1040 or Form 1040-S (or whichever is appropriate for your filing status) line 6b.
The following income restrictions result in roughly half of your benefits being taxed if you file your taxes privately or with your spouse:
- $25,000 to $34,000 if you are an individual
- If you’re married and filing together, your income must exceed $32,000 to qualify.
If your income brackets fall higher than these, 85% of your benefits could be taxed, which would include
- Over $34,000 if you are single
- Over $44,000 in case of a married person.
How to File Disability Income/Benefits On Your Federal Taxes
The SSA will provide you with a form SSA-1099 each year to report your disability benefits. This form will tell you how much money you received from the SSA in Social Security Disability payments. You will then need to report this information on Schedule SE along with the rest of your income.
The SSA will be withholding Federal (and sometimes state) taxes from your benefits if you requested it when you filled out the SS-5 application for disability benefits.
If you did not request any kind of withholding, or if this amount was not enough, you can also request to have taxes withheld from your monthly benefits. This will be taken out of your benefit check, just like payroll withholding does for employees.
States Taxes On Disability Benefits
There may be a state tax on your Social Security payments from the Social Security disability insurance (SSDI) program. However, most states exempt disability payments from state income tax, the remaining states are also considering dropping the taxes.
The taxation of Social Security disability benefits is classified differently in each state:
- States with no income tax, including any kind of taxes on disability benefits too.
- States that do not have taxes on disability benefits from income tax
- States that impose taxes on disability benefits only if the beneficiary’s AGI is under a certain amount, and
- States that have the tax disability benefits as the same as the IRS.
List of States That Tax Disability Benefits Based on AGI
- Connecticut
- Colorado
- Kansas
- Missouri.
- Nebraska.
- Rhode Island.
- Utah.
- Vermont.
- West Virginia.
List of States That Tax Disability Benefits Using The Federal Method
- Minnesota
- Montana
- New Mexico
List of States That Have Exempted Disability Benefits From Taxes
- Alabama
- Arizona
- Arkansas
- California
- Delaware
- Washington, D.C.
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- Virginia, and
- Wisconsin.
The List of States with No Income Tax
SSDI is not taxed by the state because it is not levied in these states.
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington, and
- Wyoming.
Conclusion
If you are disabled and have been receiving Social Security Disability payments, the SSA is not required to withhold taxes from your disability benefits. When it comes to being responsible for paying income tax on SSDI, only the employer has this responsibility.
However, if you end up owing more in taxes at the end of a year than what was withheld by your employer or through an agreement with the IRS to pay quarterly estimated taxes, nothing is stopping you from requesting that they hold back some money.