Filing taxes can be confusing and exhausting. People who are unfamiliar with the complexities of the Social Security Administration (SSA) system may not understand it completely at first. Let’s start with the basics: do Social Security Disability Insurance (SSDI) benefits count as income?
For the most part, SSDI payments do not count as income. However, these payments could still be taxed if they exceed a certain amount. This is based on your “provisional income.” Thankfully, this is not common.
Keep reading below as we clear up all your questions about SSDI and taxes.
Do SSDI Benefits Count as Income?
Your “earned income” is the money you receive as a result of your employment, whether for a company or for yourself as an entrepreneur or independent contractor. This encompasses both base pay and additional compensation, such as tips.
Earned income can also include less obvious sources of funds, such as net earnings from self-employment or union strike benefits. With a few exceptions, most forms of earned income are subject to taxation.
The term “unearned income” is used to describe any kind of earnings that do not result from employment or productive work. The term “unearned income” refers to any source of money that is not earned, such as investments, benefit plans, gifts, and so on.
So, because SSDI is based on how much an individual has paid into the system through Social Security taxes, it does not count as earned income.
Your eligibility for Social Security Disability Insurance payments from the Social Security Administration is significantly influenced by the amount of earned income you get on a monthly basis. The Social Security Administration will determine if you have exceeded the permitted earned income amount ($1,470 in 2023 for non-blind applications per month; $2,460 if you’re blind).
This maximum amount of earned income is intended to serve as a symbol of the limitations that come with being eligible for SSDI benefits. A person is considered capable of engaging in substantial gainful activity if they have the potential to earn over $1,470 monthly.
Remember that Social Security Disability Insurance is not based on your income. The earned maximum is not intended to restrict payments to people who are already financially struggling; rather, it is used to determine whether or not a claimant is able to be productive in some way.
Are SSDI Benefits Taxable?
The rules for taxation of SSDI benefits are the same as those for retirement, family, and survivor benefits from Social Security.
Whether or not you have to include your SSDI payments in your taxable income varies based on what the IRS considers your “provisional income.” This is the sum of your adjusted gross income, tax-exempt interest income, and fifty percent of your Social Security payments for that year.
If you plug these figures into the IRS’s online tax tool, the Interactive Tax Assistant, you’ll see that the federal government would tax just 12% of your total income.
In general, disability recipients are exempt from taxation.
For the most part, people who receive SSDI don’t have to worry about this because their income is far below the threshold at which they would owe taxes.
To ensure that recipients of disability payments are truly unable to work due to their condition, the Social Security Administration has rigorous limits on the amount of money you can earn from working while still receiving SSDI. Most recipients will have their monthly wages capped at $1,470 in 2023.
The Social Security Administration estimates that roughly one-third of disabled recipients must pay taxes on their benefits. When this happens, it is usually due to the earnings of a spouse or another member of the household.
Use the IRS’s Interactive Tax Assistant or Worksheet 1, “Figuring Your Taxable Benefits,” from Publication 915, “Social Security and Equivalent Railroad Retirement Benefits,” to find out whether your SSDI will be considered taxable.
SSDI and State Taxes
The state in which you reside may require you to pay taxes on the money you receive from your SSDI benefits. The majority of states no longer tax SSDI income, with only 12 states doing so. For example, when submitting an income tax return for the state of Illinois, SSDI is exempt from taxation.
Your tax advisor can help you figure out if your SSDI is taxable if you have to file income taxes in more than one state.
Is SSDI Back Pay Taxable Income?
Back pay is the sum of Social Security Disability Insurance compensation for the months the recipient was disabled but was still waiting for approval. A recipient’s annual income from Social Security Disability Insurance may rise if they get back pay or a lump sum payout.
This may result in people having to pay more in taxes.
SSDI beneficiaries who wish to avoid having a portion of their back pay taken from them in the form of taxes have the option of transferring any benefits that were owed to them from the prior year onto their tax returns from the year before.
If they did that, less of their income would be subject to taxes in the year they got their back pay.
Filing Your Taxes While Receiving Social Security Disability
Knowing the specifics of reporting SSDI on a federal tax return will help you avoid any mistakes. Box 5 of the Social Security Benefit Statement (SSA-1099) is where SSDI claimants must disclose their disability benefits.
In order to verify that recipients of SSDI income pay the appropriate tax, the Social Security Administration sends out this form annually.
Individuals are required to submit the total that is found in Box 5 of the SSA-1099 form on line 5a of Form 1040 or Form 1040-SR. The taxable component of the Social Security Disability Insurance benefits must be reported by the individual on line 5b of either form.
Conclusion
So, although SSDI benefits are not considered income, they can still be taxed. Luckily, most beneficiaries don’t earn enough to have to pay taxes on their SSDI benefits. To find out whether your SSDI benefits are taxable, it is recommended that you consult with a tax advisor, SSA advocate, or disability attorney.
