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SSDI Evaluation

Taxation of Social Security Disability Income

 Tax helpAllsup works hard to get claimants their SSDI awards. Meanwhile, because of the government disability backlog, eligible claimants must wait years to finally start receiving any SSDI money. Neither of us wants to see this hard-earned and long-awaited money be wasted on overpaying your taxes.

The unfortunate news is that SSDI payments are potentially taxable. The good news is that the amount taxed will probably be very low, if anything at all.

There are really two major types of SSDI payments that are subject to tax:

  • SSDI monthly payments, and
  • Lump-sum (retroactive) payments of SSDI benefits.

With both types of SSDI payments, how much that is taxable depends on the total amount of your benefits and other income.

SSDI Monthly Payments

When figuring out what's taxable, SSDI payments are treated like regular Social Security payments and reported to you on Form SSA-1099.

So in general, up to 50 percent of your benefits may be taxable each year, plus all your other income (including tax-exempt interest). Here is a quick way to check if your benefits may be taxable:

 

Worksheet to Check if SSDI Benefits Are Taxable

 


A.

 

Enter the amount from box 5 of Form SSA-1099 issued by the SSA to report amounts paid to a person and taxes withheld for the year. If you received more than one form for the year, combine all the amounts from box 5 and enter the total...
Note: If the amount here is zero or less, stop here; none of your benefits are taxable this year.



B.

 
Enter one-half of the amount on line A…

C.

 
Enter your taxable pensions, wages, interest, dividends, and other taxable income...


D.

 
Enter any tax-exempt interest income (such as interest on municipal bonds) and any exclusions from income (listed earlier)…


E.

 
Add lines B, C and D…


  • When you get through the worksheet above, compare the amount on line E to your base amount for your filing status.
  • If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year.
  • If the amount on line E is more than your base amount, some of your benefits may be taxable.

For the 2013 tax year, the base amounts are:

  • $25,000 if you are single, head of household or qualifying widow(er)
  • $25,000 if you are married filing separately and lived apart from your spouse for all of 2013
  • $32,000 if you are married filing jointly, or
  • $0 if you are married filing separately and lived with your spouse at any time during 2013

When Up to 85 Percent of SSDI Benefits Can be Taxed 

While it is not very common, up to 85 percent of your monthly benefits can be taxable in the following cases:

  • If the total of one half of your benefits and all your other income for the tax year is over $34,000 if filing single or $44,000 if you are married filing jointly; or
  • If you are married filing separately and lived with your spouse at any time during the tax year.

For more detailed information, please consult IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, available on the IRS website. This would also be a good time to consult with a tax preparer or use a tax filing program.

Lump-sum (Retroactive) Payment of SSDI Benefits

This is one area where SSDI recipients commonly trip up on.

A lump sum retroactive SSDI award represents a payment that includes benefits calculated for earlier years.

For tax purposes, you account for the retroactive award in the tax year you get the award. However, you do not treat all of the retroactive award as income in the tax year received. If you do, you are making a huge mistake that will result in you paying unnecessary taxes.

Here's how to make sure you don't make that mistake:

  • If you received a lump-sum SSDI payment in 2013 that includes benefits for one or more earlier years, it will be included in box 3 of Form SSA-1099 - the Social Security benefit statement you receive from the Social Security Administration.
  • The form also will break down the taxable part of the benefits to show the year (or years) to which they apply.

Example: You receive a lump-sum payment in 2013. You will want to report the entire lump sum amount you receive in 2013 (including the portion for 2013 and portions for earlier years) on your 2013 tax return. Since the earlier year's taxable benefits are included in your 2013 income, no adjustment is made to returns filed in previous years - so don't file amended returns.

To figure out the taxable portion of a retroactive SSDI payment for previous years, you can use the worksheets provided in IRS Publication 915. Doing these calculations by hand; however, can be extremely difficult. Because of this, it is highly recommended that you invest in some tax prep software or have your taxes prepared by a tax professional. It is worth the price if you do.

Deductions and Credits 

When figuring out the taxability of a lump-sum SSDI payment, keep in mind these two important deductions you can take:

  • You can deduct the expenses that you pay to collect your SSDI retroactive award. This means that Allsup's fee for collecting the taxable part of your SSDI benefits is tax deductible.
  • If you received disability payments through an employer's or insurance company's long-term disability policy and you had to repay the employer or insurance company for any retroactive SSDI disability payments, you can take an itemized deduction for all or part of the repayments. Calculating the deduction can be tricky here too, so please seek out some tax help for this as well.

Withholding Taxes from Social Security Benefits 

It is not required that you withhold federal taxes from your Social Security benefits. However, you may choose to do so to avoid underpaying federal taxes for the year.

You should first consult with a tax professional to see if you even need to do this. If so, you need to fill out IRS Form W-4V, Voluntary Withholding Request. This form is available on the IRS website or by calling them at (800) 829-3676, or (800) 829-4059 for the hearing impaired.

This form allows you to start or stop withholding of a percentage (7, 10, 15 or 25 percent) of your monthly Social Security benefit amount. Flat dollar amounts or other percentages are not accepted.

 Additional Resources 

In addition to the deductions and credits noted above, there are many other tax breaks that may help minimize your taxes, and there are several ways to get low-cost or free tax assistance. Get answers related to these questions