If you receive SSDI benefits, taxes may be an important consideration for you. Large lump-sum back payments could significantly raise your household income and cause you to owe additional tax.
However, in most instances you won’t owe any taxes. Tax payments only become due if your provisional income exceeds certain thresholds.
SSDI benefits do not fall within the federal income tax’s definition of earned income and, thus, are generally exempt. However, some or all of their SSDI may still be subject to taxation depending on other forms of income earned – this may occur particularly often for individuals receiving retroactive back pay awards that substantially increase their yearly income.
According to the Social Security Administration (SSA), about one third of disability recipients must pay taxes on their benefits; however, most of these individuals don’t have substantial other income and thus don’t owe much, if any tax on SSDI benefits.
Before determining whether or not your SSDI benefits are taxable, you must first calculate your household income using an online calculator provided by Social Security Administration (SSA). As a general guideline, up to 50 percent of SSDI benefits may be included as part of taxable income if provisional income falls between $25,000 for single taxpayers and $32,000 for married couples filing jointly; for higher-income taxpayers up to 85 percent could potentially be included as taxable income.
If you anticipate that taxes will be due on your SSDI benefits, requesting that the Social Security Administration withhold part of each monthly payment may help ensure you have enough set aside to cover potential liabilities at year’s end.
Twenty-eight states and the District of Columbia fully exempt your Social Security disability payments from state income tax; however, most other states impose some form of SSDI taxes. If you live in such a state that taxes SSDI payments, consulting an accountant or tax professional could save considerable amounts and reduce any unwanted surprises at tax time.
Many SSDI recipients often wonder whether or not their income from SSDI benefits is taxable, and the answer depends on both your household income and other forms of income you may receive. If married, Social Security Administration also takes your spouse’s earnings into consideration when determining if SSDI benefits should be taxed; if their annual earnings surpass $32,000 then benefits you both receive may be subject to taxes.
When accounting for multiple sources of income, disability benefits should be seen as unearned income. Therefore, the Social Security Administration has provided guidelines that identify income that does not count toward SSDI income; dividends and interest from stocks or investments would fall into this category.
Social Security disability payments are subject to marginal rates of taxation – meaning they’re only taxed at the top of your federal income tax bracket – typically between 15% and 25%. Some states, like New York, also exclude SSDI income from state taxes.
An unexpected back pay award could significantly increase your yearly income and could require you to pay taxes on much of it immediately. By amending previous year returns to spread out payments over several years, however, you could reduce overall annual income tax bills and the associated penalties.
if you are uncertain as to whether your SSDI benefits are taxable, consult a Berks County Social Security Disability attorney. They can assist in finding out the most efficient way of receiving them while avoiding taxes where applicable, assist with application processes that require five steps and filing return(s), file your return(s) themselves as well as file returns to ensure all applicable taxes have been withheld from your benefits and file returns on your behalf for you if needed. Reach out John Foy & Associates now for a complimentary consultation session today!