Answering Your Questions About Social Security Disability and Taxes

Navigating taxes can be difficult for most people at the best, but it can be even more challenging if you are trying to determine how much tax you have to pay on your SSDI benefits. 

If you’re considering Social Security Disability Insurance (SSDI) benefits, or if you’ve already sent in your application, you may be wondering what will happen once tax time rolls around. 

The Social Security Administration (SSA) has two different disability programs you can apply for: 

• Supplemental Security Income (SSI)
• Social Security Disability Insurance (SSDI)

While the SSA administers both programs, each has a different impact on your tax situation. 

SSDI payments originate through payroll deductions from when you were working. The amount you receive is affected by how much you paid into the program, among other eligibility criteria. 

SSI isn’t dependent on someone working or paying into the program. Instead of looking at your work history, SSI looks at your financial needs. SSI is not taxable.

Is Disability Income Taxable?

SSDI payments are considered to be taxable income by the IRS. But how much you have to pay — or whether you have to pay at all — depends on several factors such as your other sources of income.

Monthly SSDI benefits paid to children are generally considered non-taxable.

Does The State Tax Social Security Disability Income? 

While Michiganders are subject to a state income tax, Michigan has made SSDI benefits exempt from state tax liability. SSI benefits are also exempt from state tax liability.

How Much of My SSDI Benefits are Taxable?

If you’re single and your income is more than $25,000, or if you’re married and your combined income is above $32,000, you will have to pay at least some tax on your SSDI benefits. 

To get a rough estimate of how the IRS calculates your income for tax purposes, take 50% of your total yearly SSDI amount and add any other household income sources.

If you are single and SSDI is your only income source, it would be unusual for you to have to pay taxes on that income. If you are married and your spouse is unemployed or works only part-time, your income may be below $32,000, and therefore, you would not be expected to pay income taxes.

Depending on your family income, either 50% or 85% of your SSDI benefit can be considered taxable. 

Should I Have Taxes Withheld From My Social Security Disability?

Having taxes withheld from your SSDI payments is beneficial if you expect to pay taxes at the end of the year. 

For many people who collect disability benefits, receiving an unexpected tax bill for several hundred dollars or more can not only be a shock, but it can also disrupt your family budget or force you into debt. 

By putting aside a monthly amount, called a withholding tax, you’re preparing for that end-of-year expense. This can be exceptionally useful if you have difficulty saving money or often have unanticipated expenses that cause you to spend money that you would otherwise set aside for taxes. You may complete a W-4V Voluntary Withholding form from the IRS to withhold taxes.

Also, if the amount of taxes you withhold from your SSDI payment for the year is more than the amount of taxes you receive, you’ll get a refund. 

Is Social Security Disability Back Pay Taxable?

The short answer is yes, but there is more to take into consideration.

Because the IRS considers SSDI income to be a taxable benefit, a one-time lump sum payment — that you otherwise would have received monthly — is subject to the same tax requirements.  

Let’s look at an example using this scenario: You receive a monthly SSDI payment of $1,000, and the IRS calculates your SSDI taxes at 15%. 

In this situation, you would be responsible for paying $150 in taxes for one month. In this same scenario, if you received a lump-sum back payment of $10,000, it would still be taxed at 15%. So you would need to pay $1,500 in taxes on the back payment that you received.

It’s important to note that just because a back payment is considered taxable, doesn’t mean that you will have to pay taxes on it. Your income level might be below the taxable income threshold, even with a back payment. Or you may be able to apply some of your back payment amounts to previous years.

Determining How Much Your Taxes Will Be on Your Social Security Disability Benefits

Because each individual’s situation is unique, it can be challenging to estimate how much you might owe in taxes. To make this process less complicated, the IRS has created an Interactive Tax Assistant (ITA) that walks you through a series of questions geared at determining how much money you will owe in taxes. 

For example, the ITA calculated the amount of taxes for an unmarried individual with $22,000 in SSDI payments, and no other sources of income, to be $0.

Another great resource for estimating how much income tax you or your family may be required to pay are the tax tables below:

• Reference the correct table that reflects your current marital status. 
• Next, look for the range that includes your monthly income in the left column, then check the corresponding amount in the right column to determine the maximum portion of your SSDI that could be taxed. This is the amount of your SSDI that the IRS will use to determine your income for the year. In other words, the IRS doesn’t necessarily consider every dollar you receive from SSDI to be taxed.* 

Individuals

Married Couples

*If the IRS deems your disability benefits to be taxable, they will calculate the tax you have to pay based on your marginal tax rate. This doesn’t mean you pay tax based on 100% of what you received in SSDI benefits. Instead, you’ll pay taxes calculated on 50% or 85% of what you received. 

Have A Social Security Disability Case?

Trying to understand all the nuances of applying and managing your disability case can be overwhelming. For a higher rate of success in getting the SSDI compensation you deserve, contact us at The Sam Bernstein Law Firm.

Social Security Disability Law is complicated, but finding the right Michigan disability lawyer is simple.

Click the button below to fill out a quick form or Call 1-800-CALL-SAM today for a free, no-obligation remote consultation from the safety of your home.