Social Security disability benefits (SSDI) CAN be subject to tax, but most receiving disability benefits don't make enough to be taxed. Approximately 1/3 of Social Security disability recipients do pay some kind of taxes. It may be because of their spouse's income or other sources of income. On the flip side, those receiving Supplemental Security Income (SSI) benefits are not taxed.
Federal Taxation of Social Security Disability Benefits
Here's how it all works. If you are married and file jointly, and you and your spouse earn more than $32,000 per year in income, a portion of your SSDI benefits are likely to be subject to tax. If you are single, and you earn more than $25,000 in income per year, a portion of your SSDI benefits can also be subject to tax.
How much your SSDI benefits is subject to tax depends on how much you earn in income. The IRS sets the threshold for taxing Social Security disability benefits at the following limits:
$25,000 if you’re single, head of household, or qualifying widow(er),
$25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
$32,000 if you’re married filing jointly,
$0 if you’re married filing separately and lived with your spouse at any time during the tax year.
This means that if you’re married and file a joint tax return, you can have a combined income of up to $32,000 before you’d have to pay taxes. There are two different tax rates the IRS can apply, based on the income you report and your filing status.
If you’re single and file an individual tax return, you’d pay taxes on:
Up to 50% of your benefits if your income is between $25,000 and $34,000
Up to 85% of your benefits if your income is more than $34,000
If you’re married and file a joint tax return, you’d pay taxes on:
Up to 50% of your benefits if your combined income is between $32,000 and $44,000
Up to 85% of your benefits if your combined income is more than $44,000
Simply put, the more income you earn individually or as a married couple, the more likely you are to pay taxes on you Social Security disability benefits. In terms of the actual tax rate that’s applied to these benefits, the IRS uses your marginal tax rate. So you wouldn’t actually be paying a 50% or 85% tax rate, you’d actually pay your ordinary income tax rate based on whatever tax bracket you are in.
It’s also important to know, that you could be pushed into a higher tax bracket if you receive Social Security disability BACK payments. It is because, these back payments can be paid to you in a lump sum to cover periods where you were disabled but were still waiting for your disability claim to be approved. Most cases take months, even years for approval, so all those months you are waiting, are months where Social Security may back pay you for if approved. This can lead to pushing you into a higher tax bracket. Good news is that you can apply some of those benefits to past years’ tax returns retroactively to spread out your tax liability. You’d need to file an amended return and seek assistance with your accountant.
State Taxation of Social Security Disability Benefits
Most states do not tax Social Security disability benefits. Texas is not a state that taxes disability benefits.