Disability Insurance & Taxation

Recipients might owe income taxes on Social Security Disability benefits.

Although it is rare, if you are receiving disability insurance benefits, you might owe income tax come April 15. The total income you might receive from Social Security Disability, or SSD, is very limited so it is not likely you would owe taxes unless you have additional sources of income. If you are receiving disability payments from an employer, this income will be taxed in some way.

Taxable SSD Income

If you receive SSD and also have other income from sources such as self-employment, interest, dividends or a pension, then you might have to pay taxes on those sources. The IRS taxes you based on the amount of money you received from the other sources of income. However, you will never be taxed on more than 85 percent of your SSD benefits. For example, if you file individually and you combine to make between $25,000 and $34,000 that year, you might have to pay taxes on 50 percent of your SSD benefits. If your income is more than $34,000, you can be taxed on up to 85 percent of your benefits.

Percent Taxed

The numbers and how much you can be taxed changes slightly if you file a joint tax return. You can pay taxes on 50 percent of your benefits if you and your spouse have a combined income $32,000 to $44,000 annually. If the income combines for more than $44,000, you can be taxed on up to 85 percent of your benefits. If you are married but still file your taxes separately, the odds of your benefits being taxed increases.

Tax Form

During tax season you receive a SSA-1099 form, which is a Social Security benefit statement. This will show how much money you received in SSD during the previous year. This form will help you to find out whether your benefits will be taxed when you complete your federal tax return. As with employment income, you may elect to have a percentage of your SSD benefits withheld for taxes.

Private Disabilty Benefits

Disability benefits that are provided by an employer will be taxed; the IRS will tax either the premiums paid for the insurance or the benefits that have been paid out to the employer. Employees are sometimes allowed to elect to pay for the disability insurance with after-tax dollars, in which case the company can make disability payments to claimants tax-free.

Taxable Benefits

If an employer deducted the premiums for its insurance, any money received from that is taxable. If an employee purchased more coverage in addition to what the company provided, the money they receive from that would come tax-free. If an employer deducts what it pays for disability insurance from its income, any money paid to employees claiming disability is fully income taxable.

References

• Taxation of Disability Insurance Plans
• Managing Your Taxes
• SSDI Taxes