Are Social Security Disability Benefits Taxable?

taxes and social security disability benefitsAfter waiting to be approved for Social Security Disability benefits, some claimants may be surprised to learn that their benefits may be taxed, so the overall amount of benefits they receive will be reduced. However, Social Security Disability Insurance (SSDI) benefits are not always taxable.

Below, our Oshkosh Social Security Disability lawyers discuss whether you are required to pay taxes on benefits. Request a free consultation today if you need help with your disability claim.  

When Disability Benefits Are Taxed

For the majority of claimants, Social Security Disability benefits are not taxed. However, if the claimant has other substantial income, he or she may be liable for taxes on a portion of their income. This could happen if the claimant:

  • Works
  • Is self-employed
  • Has interest, dividends or other income from savings
  • Has a spouse who works

Taxable Amounts of Social Security Benefits

The taxable amount of your Social Security benefits depends on your total income and your filing status. If your only form of income is SSDI benefits, you may not owe any taxes on this income.

If you earned additional income besides your SSDI benefits or your spouse earned income and you file jointly, you may owe taxes on up to 85 percent of your benefits under the following circumstances:

  • Filing a federal tax return as an individual with an annual income over $35,000
  • Filing a joint tax return with a combined annual income over $44,000

The tax rate you pay on your benefits is the same as the rate for the rest of your income. For most SSDI claimants who have to pay taxes, they will pay their marginal tax rate of 10 to 15 percent of their benefits or 33 to 35 percent of their benefits for higher incomes.

The Social Security Benefit Statement you receive each January will show the amount of benefits you received last year. You can use this form when you complete your federal income tax return.

What About Back Payments?

Many Social Security claimants must wait months or years before their claim is approved, which may result in a large back payment for the months when they were eligible until the date of their award.

When claimants are paid for benefits for the months they were disabled but were not yet approved for benefits, their income for the year that they were approved for benefits may be significantly higher. This may result in a greater tax liability for that year.

Claimants can offset some of this liability by applying the SSDI benefits they were owed from prior years to prior tax returns so that their income for the year they receive the back payment is lower. This requires amending prior tax returns and possibly owing taxes for those years, but this strategy may help to reduce the larger tax liability for the year with back pay.

State Taxes on Disability Benefits

Some states impose their own tax on disability benefits. Some use the same income brackets as the federal system while others use their own system. However, Wisconsin is not a state that currently imposes state taxes on disability benefits, so your only tax liability related to your Social Security Disability benefits is on the federal level.

Our Disability Attorneys Are Ready to Help

If you are having issues understanding your Social Security benefits, we recommend that you reach out to an experienced disability attorney from Sigman Janssen.

Our attorneys are prepared to help you throughout the claims process and answer any questions or concerns you may have.

Schedule a free, no-obligation case review. (877) 888-5201.