Monday, February 3, 2014

Are My Social Security Disability Benefits Taxable?

For the most part, Social Security Disability benefits are not taxed in their totality.  You will never have to pay federal taxes on more than 85% of your Social Security Disability benefits.  In most cases, you only have to pay taxes on your Social Security when you have other substantial income such as dividends, past wages or other taxable income.  Moreover, SSI payments are never taxed.  

As a general rule, you only have to pay federal taxes on your SSD benefits when you report more than $25,000 on your individual filling.  If you file jointly with your spouse, you will only have to pay taxes if your combined income is more than $32,000.

However, as I indicated before, you never have to pay taxes on 100% of your benefits.  For example, if you and your spouse have a combined income between $32,000 and $44,000 you only have to pay taxes on 50% of the Social Security Disability benefit.  If you and your spouse make more than $44,000, then you will have to pay taxes on 85% of your benefit.  

What about large retroactive payments received in 2013?  Fortunately, in 2013 many of our clients received large retro-payments (back pay).  Under these circumstances, your tax rate might be higher than usual because of the lump sum.   This is a tricky situation.   Fortunately, the IRS allows taxes on Social Security Disability retro payments to be spread out over previous tax years using the current tax return and  the good news is that you don't have to file an amended tax return for the prior years.  This will prevent you from paying higher taxes in 2013.  If you received a lump sum, you will see the amount entered in Box 3 of the 1099 form that Social Security will send you.  Apparently, it is easy to make a mistake when you try to figure out how to spread the lump sum payment by yourself.  For this reason, it might be a good idea to hire a tax professional to help you figure this out.  Worksheets provided in IRS publication 915 and tax preparation software can also be used to determine the tax liability of a large retroactive SSDI payment.  

Disclaimer:  I am a Social Security Disability Lawyer, not a tax lawyer or an accountant.  Please consult an expert in tax law for specific advise.