Income Tax Rules for Social Security Disablilty Payments

It can be tricky to figure out how to file income taxes if you receive Social Security Disability payments. The rules as to how much of your benefit is taxable vary depending on your total annual income, filing status and whether or not your received a lump-sum payment during the tax year in question.

Tax Documents

The Social Security Administration is required to send a Social Security Benefit Statement (Form SSA-1099) reporting the total amount of benefits paid in the previous year. Like other tax documents, the SSA-1099 must be sent by the end of January every year.

Federal Withholding

Federal taxes are not withheld from Social Security Disability payments. If you make enough money annually to have to pay federal taxes and don't want to pay in all at once, you can fill out Form W-4V (Voluntary Withholding Request) to opt to have a percentage of your benefit withheld each month for taxes (see Resources below).

Taxable Benefits

How much of your Social Security Disability income is taxable depends on your total income and your tax bracket. Recipients making between $25,000 and $34,000 (either separately or with a spouse) are subject to income tax on half of their yearly SSDI benefit amount. A lower annual income means your SSDI income isn't taxable, but you may still have to file a tax return.

Effect of Additional Income

If you have other income which, when added to half of your benefits is equal to $34,000 or higher, you will be taxed on 85 percent of your SSDI benefit. If you are filing taxes with a spouse, you can have a combined income of $44,000 before the higher tax rate rule kicks in.

Lump-Sum Payments and Taxes

Lump-sum payments don't necessarily have to be taxed all in the same year they were received. In addition to showing the total benefit received for the year, your SSA-1099 will break down how much money was paid retroactively for previous years.

Lump-Sum Election Rule

Opting to take advantage of the Lump-Sum Election rule can reduce taxable benefits for the year the payment was received. The rule allows you to figure the taxable portion of benefits for previous years. That amount is then added to your taxable income for the earlier year and subtracted from the current year's taxable income. IRS Publication 915 provides a worksheet to walk you through these calculations (see Resources below).

Resources

• Form W-4V: Voluntary Withholding Request
• Use IRS Pub. 915's worksheets to figure taxable benefits