How to File Your Taxes Without Paying Taxes on Social Security Disability
The Social Security disability insurance program offers monthly benefits to disabled workers who are unable to take part in "substantial gainful activity" that earns them a certain amount of money each month. Disability benefits are considered income by the Internal Revenue Service, however, and depending on the taxpayer's annual income, he may find his benefits subject to tax.
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Things You'll Need
- IRS Form SSA-1099
- IRS Form 1040 or 1040A
- IRS Publication 915 and Worksheet A
Instructions
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Avoiding Income Tax on Disability Benefits
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Obtain IRS Form SSA-1099, which arrives in the mail by the end of January and gives your disability benefit amount for the previous year. If you received disability benefits but don't receive an SSA-1099, contact Social Security at 800-772-1213 to request one.
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Figure your combined income on Worksheet A of IRS Publication 915. The IRS sets the tax rate on disability benefits depending on your combined income, which is your adjusted gross income, nontaxable interest and one-half of your Social Security disability benefits. You also have to take into account your filing status: whether it's individual, married filing a joint return, or married filing a separate return.
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Enter your adjusted gross income on Form 1040 or Form 1040A. Adjusted gross income is money you earned from salaries, investments and other eligible income, less deductions for payments to health savings accounts, alimony, student loan interest, IRA contributions, one-half of the self-employment tax and other miscellaneous expenses.
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Mark your filing status at the top of the return. If you file as an individual, there's no federal income tax on benefits if your combined income is less than $25,000, as of November 2010. If you file a joint return with your spouse, there's no federal income tax on benefits if your income is less than $32,000. If you're married but filing separately and didn't live with your spouse for any part of the tax year, you aren't taxed on your Social Security benefits if your combined income is less than $25,000. If you lived with your spouse at any time and are filing as "married filing separately," then there's no minimum combined income level. Your benefits are taxable.
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Sign and mail your return to the Internal Revenue Service by April 15 or file for an extension. The IRS grants most extensions for taxpayers that request one by the normal filing deadline. The extension gives you until October 15 to file your tax return.
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Tips & Warnings
The other means by which you can avoid income tax on Social Security disability is to move to another country. The United States has tax treaties with Canada, Egypt, Germany, Ireland, Israel, Italy, Japan, Romania and the United Kingdom. Under the treaties, Social Security benefits aren't taxable by the Internal Revenue Service for residents of those countries. The law in such countries, however, may impose taxes on other income you earn while residing there.
If you've returned an overpayment to the Social Security Administration, you may subtract that from your combined income.
Don't neglect to inform the IRS of your disability benefits even if you don't owe tax on them. They're still considered income, and depending on how much you made in the tax year, you may still owe taxes on other sources of income such as wages, interest and dividends.
References
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