How to File Taxes on Disability Benefits

If you receive Social Security Disability income, the Social Security Administration will send you a form at the beginning of the year summarizing your total disability earnings for the previous year. It is called SSA-1099 Social Security Benefit Statement, and you will need it to fill out your tax forms. The statement contains your net disability earnings in "Box 5." Whether you have to pay taxes on all or part of the disability income depends on how much other income you report for the tax year. The Social Security Administration looks at your combined total income to determine how much, if any, of your benefits will be taxed. Combined income, as defined by the administration, is your adjusted gross income as calculated by adding half your disability benefits to all your other income and non-taxable interest. If an individual's combined income is more than $25,000 but less than $34,000, up to 50 percent of the individual's disability benefit could be taxable (The amount is $34,000 for couples). For earnings more than $44,000, up to 85 percent of disability income could be taxed.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• W-2 wage earnings statements
• 1099 earnings statements detailing interest on savings accounts (1099-INT)
• stock dividends (1099-DIV) and foreign investment income (1099-0ID)
• Any other forms you received showing income or business losses

worksheet

1. The simplest way to calculate whether your disability income is subject to federal income tax is to fill out "Worksheet A" in the forms section of the IRS Web site. The form directs you to add half the amount of your disability earnings as it appears in box 5 with all your other income--wages, interest, dividends, etc. If the total is more than $25,000, your disability benefits will likely be taxed.

2. You will then need to enter the information in your 1040 tax return. Fill in lines 7 through 19, transferring the amounts of income you received from any forms sent to you by employers or financial institutions.

3. On line 20a, fill in the amount that appeared in Box 5 of your SSA-1099 Social Security Benefit Statement. Divide line 20a by 2 and place that number in line 20b on the 1040 form.

4. Next, fill in lines 23 to 35, telling the IRS about any expense you had that might lower your taxable income. These are a very narrow set of expenses that include things like alimony payments, contributions to IRAs and student loan interest payments.

5. Add lines 23 through 31a and lines 32 through 35. Put the total on line 36, which represents your adjusted income.

6. 
    
   1040 U.S. Individual Income Tax Return (p. 2).

   Your Social Security disability income will be taxed at the same rate as total taxable earnings. You do not pay tax on your total adjusted income, because you are entitled to standard deductions and in some cases, itemized deductions for certain tax-exempt expenses. Be sure to note your exemptions on page 2 of form 1040.

7. The tax rate depends on your total earnings after deductions. For 2009, the rates are: 10 percent for income up to $8,025; 15 percent for income up to $32,550; 25 percent for income up to $78,850; 28 percent up to $165,550; 33 percent for income up to $357,700; and 35 percent for any amount above $357,700.

Tips & Warnings

• When you prepare you taxes, it is very important that you read information on the IRS Web site, consult a professional accountant or use a computer program that will help you make calculations. This is particularly important when you're trying to determine if you have any expenses on page 1 of the 1040 form or any qualified deductions on page 2. Qualified expenses might reduce your combined income and spare you from paying tax on your disability income. And although qualified deductions will not affect whether you must pay taxes on some of your disability earnings, they could reduce your overall tax rate
• Before you begin entering information on your 1040, take a look at IRS Publication 915, "Social Security and Equivalent Railroad Retirement Benefits." There is a useful worksheet on page 16 of this manual, available on the IRS Web site.

Resources

• Taxes and Your Social Security Benefits
• IRS Publication 915, Information Taxable SS income