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Why are disability benefits taxable?

Taxes and Social Security Benefits

Disability benefits are offered through the Social Security Administration (SSA) to those who are unable to work due to a disability or medical condition. These benefits can provide assistance for everyday living expenses and medical bills. Although disability benefits are usually not counted as taxable income, there could be some cases in which you will end up having to pay taxes on these payments.

Income Limits

There are two main types of disability benefits that are available through the SSA: Social Security Disability Insurance (SSDI) benefits, which are based on your work history, and Supplemental Security Income (SSI) benefits, which are provided for low-income individuals. The majority of both SSDI and SSI benefits are not taxable.

If you or your spouse receives SSDI benefits as well as another source of income, you could likely be taxed for your benefits. Note that if you had enough income for your disability benefits to be taxed, then you probably wouldn’t qualify for SSI benefits anyways, as they are meant for low-income applicants. Therefore, the income limits for your disability benefits most always apply to SSDI recipients.

Whether filing your taxes individually or with your spouse, the following income limits result in about half of your benefits being taxed:

  • Over $25,000 and less than $34,000 for an individual
  • A combined income over $32,000 if married and filing jointly

For higher income brackets, 85% of your benefits could be taxed, including:

  • Over $34,000 if single
  • Over $44,000 if married

Back Payments

Some forms of disability benefits could result in back payments for the time you were disabled but not receiving benefits, as well as one-time death payments for the survivor of a worker receiving benefits who has passed away. These benefits are usually paid through the SSA in a lump sum.

Lump sum payments for death benefits and back payments can be subject to taxes for that year, which could move you into a higher income bracket and increase your amount of taxes to be paid. You may be able to apply some back payments to previous years if that was the time period for which the benefits apply. This may lower your tax payments for the current year.

Marginal Tax Rate

If your source of income is over the limits mentioned above, it will be taxed at your marginal tax rate. What this means is that you wouldn’t be paying taxes on 50% or 85% of your benefits, depending on your income level, but rather the amount of taxes would be 10-15% on 50% or 85% of your benefits, or 33-35% of your benefits for a higher income.

Getting Help with Your Disability Benefits

If you are having trouble understanding your disability benefits and how you may have to pay taxes on them, you may want to consider hiring a disability benefits lawyer or advocate to help you through the process. A lawyer or advocate can help you with your application and assist you with any questions you may have.