Know which income is taxable and which is not
If all of your income during 1998 came from government disability benefits, you probably will not have to pay taxes.
However, if you had a good amount of other earned or taxable income, the Internal Revenue Service (IRS) will want its share, plus a cut of your benefits.
What you have to pay
In general, other "taxable" income includes wages, some long-term disability payment, investments, inheritances, etc.
Figuring out whether you owe taxes on your benefits is relatively simple. If all your income during the past year came from State Disability Insurance (SDI), Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), then you will not have to pay federal or state income taxes.
SSI income is never taxed, by the state or the feds, regardless of any other taxable income you earned or received during the past year.
State Disability benefits are only taxable if you switched from an Unemployment claim to an SDI claim without first getting Unemployment to "disqualify" you on their computers. Then, SDI benefits are taxed at the same rate as Unemployment benefits.
There are exceptions
Social Security Disability Insurance is more complicated. SSDI benefits are not taxable until you receive or earn a certain amount of other taxable income in the tax year.
The formula works roughly like this: If half your SSDI benefits, plus your other taxable income, adds up to $25,000 or more ($32,000 for married couples, filing joint tax returns), then half of your benefit may be taxed at the same rate as your other income. If half your benefits, plus your other taxable income, comes to $34,000 ($44,000 for married couples) or more, then 85 percent of the SSDI is taxable. This formula applies as well to railroad retirement or other taxable government pensions.
Individuals who receive long-term disability (LTD) payments from a previous employer may fall into one of these categories. LTD payments are not taxable if you paid the premiums yourself. However, if the LTD was part of your company's benefits package, and the employer paid for the benefit, then your LTD income is taxable. If you and your employer split the cost of the plan, then a portion of the income from it is taxable.
Likewise, individuals who worked for part of the year, and collected SSDI, will have to pay taxes on both, if the earned income plus half the benefit exceeds the amounts listed above.
What's taxable and what isn't
Lump sum benefit payments (for instance, large retroactive settlements from Social Security) can be included in your current tax year income or, if the payment covers past years, can be distributed over those past tax years. Recipients get to choose whichever option works to their tax advantage.
Money received from the sale of a life insurance policy (viatical settlement) is generally not taxable and would not push your disability benefits into a taxable category. However, if you sold a life insurance policy, you will receive a report, a 1099-LTC, on the income, and you will have to file IRS Form 8853 (Medical Savings Account and Long-Term Care Insurance Contracts) along with your 1040 tax return.
If your "other" taxable income is large enough to drag your disability benefits into a taxable category, then you will need Publication 915 from the Internal Revenue Service (IRS) to file your taxes. The toll free number for IRS publications is (800) 829-3676. You can get IRS forms and instructions by fax at (703) 368-9694. Or go cyber at www.irs.ustreas.gov. The IRS general information number is (800) 829-1040.
Do not call Social Security for tax information. Social Security employees are forbidden to discuss taxation with recipients except in the most general way.
Where to find help (Los Angeles area)
If your tax situation is complicated, you might want to hire an accountant to do your taxes for you. The HIV/AIDS Legal Services Alliance, the legal arm of AIDS Project Los Angeles, also provides a variety of tax assistance. If you need help completing tax forms, HALSA can connect you with V.I.T.A. (Volunteer Income Tax Assistance). V.I.T.A. will see clients on weeknights at APLA and on Saturdays at AIDS Service Center in Pasadena. Call (626) 441-8495, Ext. 130.
HALSA may also be able to help people on disability with past or current tax debts to the IRS or the California Tax Franchise Board. After having you complete a tax information questionnaire, the lawyers may be able to advocate on your behalf with both tax agencies. Although the IRS does not waive past tax obligations, HALSA can help get them off your back.
For other benefits questions, call APLA's Benefits Department at (323) 993-1472.