Allsup works hard to get its claimants their SSDI awards. Meanwhile, because of the government 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. Also, unfortunately, explaining how they are taxed is easier than actually figuring out how much is taxed.
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 2008 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 2008
- $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 2008
One more thing you should know is that there are situations when more than 50 percent of your SSDI payments may be taxable. 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. If there is one tax area that SSDI recipients are most likely to trip up on, this is it.
A lump sum retroactive SSDI award represents a payment that includes benefits calculated for earlier years. You account for the retroactive award in the tax year you get the award. However, 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.
If you received a lump-sum SSDI payment in 2008 that includes benefits for one or more earlier years, it will be included in box 3 of Form SSA-1099. The form will also break down the taxable part of the benefits to show the year (or years) to which they apply.
The entire lump sum amount received in 2008 (including the portion for 2007 and portions for earlier years) would be included on the 2008 tax return. Since the earlier year’s taxable benefits are included in your 2008 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.
There is also a tax credit available for those on permanent and total disability.