Being approved after months or even years of waiting for Social Security disability benefits is a huge relief; you can finally enjoy a little more financial freedom knowing you have a steady income.
However, some recipients worry that their newfound freedom won’t last because they forgot to make sure this income won’t be taxed by the same government that supplies it.
The good news is most disability benefits are not taxable, but in certain circumstances there are exceptions.
No two disability cases are the same. To find out if your Social Security income is taxable or not, you should call an experienced tax professional or accountant. In addition, even if your only source of income is non-taxable disability benefits, you still need to file your tax return each year.
Taxes on DIB Recipients
If you receive supplemental security income (SSI), it’s highly unlikely your income will be taxed. However, for those who receive disability insurance benefits (DIB), the story is a little more complicated.
Up to one-third of DIB recipients pay taxes on their income, usually because they have access to another significant source of income besides DIB payments.
Single DIB Recipients
The earning threshold for non-married disability recipients is $25,000. Your income includes 50 percent of how much you receive from DIB and any other wages, interest, or other taxable income (including investment dividends and income from rent or other sales) you earn in a year.
If your combined annual income is over $34,000 annually, you may be subject to even higher taxation on an even greater amount of your DIB. For example, if you make less than $34,000, you may only be subject to 15 percent tax on 50 percent of your benefits. But if you make more than $34,000, you may pay something like 25 percent on 65 percent of your benefits.
Specifics will vary from case to case. Make sure to contact a Social Security disability lawyer or certified accountant if you are confused about the details of your situation.
Married DIB Recipients
For married couples filing jointly, the threshold for paying taxes on DIB is $32,000 annually. This includes both partners’ income (regardless of which one receives Social Security benefits) and 50 percent of the amount you receive from DIB, just like single recipients.
The threshold for paying higher taxes on a greater percentage of your benefits for couples filing jointly is $44,000. After this amount, you may be subject to tax increases the same as single recipients are.
None of these rules apply if you are married but file separately from your spouse. In this case, your DIB income will be taxable no matter what.
Taxes on Past Due Benefits
Your first disability payment may look a lot larger than the typical monthly amount because the Social Security Administration (SSA) has to account for the long process of applying and getting approved while you were disabled. This after-the-fact compensation is called past due benefits, and is also known as back pay.
Your past due benefits are always subject to income tax.
Because these benefits sometimes account for multiple years’ worth of waiting, you may be able to apply some of your back pay to previous tax returns. You can do this without having to amend old returns, because the IRS allows you to distribute benefits on your current tax return.
State Taxes on Social Security Disability Benefits
Indiana does not tax Social Security disability benefits, whether SSI or DIB. However, the following states across the U.S. impose some form of tax on Social Security disability income:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Keep in mind that these states have their own set of exceptions and specific rules regarding Social Security disability benefits. Contact a local attorney or tax expert to find out if your situation exempts you from paying taxes on your benefits.
Evansville Attorneys Are Here to Help
You may be worried about taxes on your disability benefits before you’ve even been approved. If this is the case, you can read more about building a strong disability case while you wait. You can also consider contacting a local Evansville attorney to assess your situation and take over this complicated, frustrating process for you. Give Hensley Legal Group a call today for a free consultation of your Social Security disability case.