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Taxation of Disability Benefits

Spring 2011

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People collecting disability benefits may still need to file and may owe income taxes on their disability payments. This is true whether the disability payments come from Social Security or from disability insurance plans or both. The rules vary between public and private benefit plans and can be complicated. It is recommended that you consider hiring a tax consultant at least for the first tax year of receiving disability benefits.

While most states' tax laws tend to mirror those of the IRS, there may be minor differences that should be checked when filing. This article deals strictly with federal income taxation by the IRS.

It should also be noted that any earnings from part-time work while also collecting disability would be considered taxable income and may have an effect on how the disability benefits are taxed.


Social Security Benefits

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Supplemental Security Income (SSI). Because SSI is a needs-based program for people with limited income, it is the rare exception that a person collecting any portion of SSI benefits would owe income taxes. People receiving SSI benefits, as their only source of income would not be taxed on that benefit. You may not need to file a tax return; the Web site at www.irs.gov/individuals/article/0,,id=96623,00.html will help you determine whether or not you need to file.

Social Security Disability Insurance (SSDI). Most people receiving SSDI benefits will need to file an income tax return, even if there may be little or no tax due. However, if there is additional income to SSDI benefits such as wages, self-employment, interest, dividends, pension, taxable disability insurance, this can cause a portion of the SSDI benefits to also be taxable.

Rather than provide a separate, lower tax table for Social Security benefits, the IRS provides a break by taxing only a portion of the Social Security benefits depending on the amount of other income. No one pays federal income tax on more than 85% of his or her Social Security benefits based on IRS rules. If you:

  • File a federal tax return as an "individual" and your combined income* is
    • Under $25,000, none of the Social Security benefits are taxable.
    • Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
    • More than $34,000, up to 85% of your benefits may be taxable.
  • File a joint return, and you and your spouse have a combined income* that is
    • Under $32,000, none of the Social Security benefits are taxable.
    • Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
    • More than $44,000, up to 85% of your benefits may be taxable.
  • Are married and file a separate tax return, you probably will pay taxes on your benefits.

* Combined income = your adjusted gross income + nontaxable interest + half of your Social Security benefits

If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have taxes withheld from your benefits. For more information about taxation of benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Note: These dollar amounts are not indexed for inflation.

Every January you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year. You can use this statement when you complete your federal income tax return to find out if your benefits are subject to tax.

Although you're not required to have federal taxes withheld from your Social Security benefits, you may find it easier than paying quarterly estimated tax payments. To have taxes withheld from your Social Security payments, you should complete IRS Form W-4V (Voluntary Withholding Request). This form is available on line at www.irs.gov/pub/irs-pdf/fw4v.pdf or by calling the IRS at 800.829.3676.

On the W-4V, you can select what percentage of your monthly benefit amount you want withheld either 7%, 10%, 15% or 25%. Only these percentages can be used. Flat dollar amounts are not acceptable. After you've made your selection, sign and return the form to your local Social Security office by mail or in person.

For more information about Social Security benefits and your taxes, there are two IRS publications you will find helpful:

  • Publication 554, Tax Information for Older Americans and
  • Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits.

You can order these by calling the Internal Revenue Service's toll-free telephone number, 800.829.3676, or you may access them on line at www.irs.gov.

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This article was provided by Being Alive. It is a part of the publication Being Alive Newsletter. Visit Being Alive's website to find out more about their activities, publications and services.
 
See Also
More on Social Security Disability Insurance and HIV/AIDS

 

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