Once you start receiving Social Security disability benefits, your first question may be “is Social Security disability taxable?”
Unfortunately, the answer to that question is “it depends”. Read on to find out what Social Security disability is, who must pay taxes on their benefits, and how to report your benefits at tax time.
What is Social Security Disability?
Social Security disability, or SSDI, is a program administered by the SSA that provides benefits to workers who are unable to work due to a debilitating illness or injury. In order to be eligible for disability benefits, you must have a condition that has prevented you from working for at least a year, and your condition must be verified by a doctor. There are many medical and mental conditions that may qualify you for disability.
Disability benefits are only available to workers, which means you must have a work history to receive benefits. In some cases, family members of the worker may also be able to collect benefits, depending on their age and other factors. Your disability benefits are based on your average lifetime earnings and are calculated similar to how your retirement benefits are calculated. You can see an estimate of your disability, retirement and family benefits on your annual benefit statement. The average disability payment in 2011 is $1,065 per month.
Is Social Security Disability Taxable?
Social Security disability is treated the same as regular Social Security benefits (retirement and survivor benefits) for tax purposes. In most cases, if disability is your only source of income, you will not owe any taxes.
If you do have other sources of income, a portion of your Social Security disability benefits could be taxed, depending on the amount of your other income. In general, the amount of your benefits that will be taxed is based on the following rules:
1. If you are single and your modified adjusted gross income (MAGI) plus half of your Social Security benefits is more than $25,000 but less than $34,000, then up to half of your disability benefits will be taxable. If your income is above $34,000, then up to 85 percent of your Social Security may be taxed.
2. If you are married and file a joint return with your spouse, then your MAGI plus half of your Social Security would need to be over $32,000 before any of your Social Security would be taxable. For income over $32,000 up to 50 percent of your benefits will be taxable, and for income over $44,000 up to 85 percent of your benefits will be taxable.
3. If you are married but you and your spouse file seperately, the income threshold is zero, which means your Social Security benefits may be taxed from the first dollar.
You may have noticed that the term modified adjusted gross income was mentioned several times in the rules above. For purposes of determining if your Social Security is taxable, MAGI means your income for regular tax purposes (including wages, interest, dividends, self employed income, etc.) plus any tax exempt income you may have earned.
Reporting Your Social Security Income on Your Tax Return
If you are receiving Social Security benefits at the end of each year you will receive IRS Form SSA-1099 which details the amount of benefits you received from Social Security for the current tax year. You should report this income on your Form 1040 – US Individual Income Tax Return along with any other income you may have received.
A quick way to estimate if any of your Social Security benefits will be taxable is to use the worksheet provided in IRS Publication 915 – Social Security and Equivalent Railroad Retirement Benefits available at www.irs.gov.