Social Security benefits are offered to support individuals who may become disabled or need additional income support. How these benefits are taxed can be complicated and involve several government agencies. Here are some frequently asked questions about Social Security Disability benefits and taxes.
Is Social Security Disability Taxable? 10 FAQs Regarding Benefits and Taxes
- What are SSDI and SSI?
- How do I Apply for Social Security Disability Benefits?
- What are Work Credits and How Many Do I Need to Qualify for SSDI?
- Are Social Security Disability Benefits Taxed?
- What Income Levels Trigger Tax on Social Security Benefits?
- Is Disability Back Pay Taxable?
- Will My State Tax My SSDI Benefits?
- How are Auxiliary Benefits Taxed?
- What is Voluntary Tax Withholding (VTW)?
- Can the IRS Seize Disability Benefits to Settle a Tax Debt?
In some cases, disabled workers who earn Social Security Disability Insurance (SSDI) benefits may be taxed on a portion of their benefits. To avoid tax penalties and extra fees, it’s important to understand what taxes you need to pay.
1. What are SSDI and SSI?
The Social Security Administration (SSA) is a federal agency that oversees many different programs such as retirement and disability benefits. This agency was established to aid workers and dependents, provide unemployment insurance, and assist the blind and handicapped. There are two programs that provide support for those suffering from disabilities: SSDI and SSI. SSDI stands for Social Security Disability Insurance and SSI stands for Supplemental Security Income.
Workers who have paid into the Social Security trust fund through Social Security and Medicare (FICA) taxes may be eligible for Social Security Disability Insurance (SSDI) authorized in Title 2 of the Social Security Act. In some cases, dependents of a disabled worker may also qualify for SSDI benefits. Obtaining SSDI benefits involves applying for benefits, appealing possible denials, and a lengthy waiting period. Those who receive SSDI, as well as those who have additional income sources, may be required to pay income taxes on a portion of their benefits.
Supplemental Security Income (SSI) is a program established for those who are disabled and have limited income. This program was authorized under Title 16 of the Social Security Act and in some cases, a claimant who receives SSDI may be eligible for SSI as well. Usually, the Social Security Administration will consider your eligibility for SSI when you submit a request for SSDI.
2. How Do I Apply for Social Security Disability Benefits?
A disabled worker can apply for disability benefits online through the Social Security Administration website. There are also options to call the SSA or even apply in person at your local Social Security office with an appointment. Those claimants who live outside the U.S. and its territories can contact the nearest U.S. Embassy, consulate, or Social Security office. Determining if your physical or mental disability qualifies for disability benefits is another issue that may require assistance from an experienced professional.
The Social Security Administration will require additional information and supporting documentation to justify your disability claim. Be prepared to provide the SSA with information related to past work, bank information, your Social Security Number, the amount of money earned in this and previous years, proof of identity, W-2s, and medical evidence.
3. What are Work Credits and How Many Do I Need to Qualify for SSDI?
To qualify for Social Security Disability Insurance (SSDI) you must be disabled and also must have worked enough within a recent period while paying Social Security Tax. Work credits are a system designed to determine if an applicant has worked enough to qualify for disability benefits. Generally, you are eligible to earn up to four credits per year. The value of a work credit changes over time but currently equates to roughly $1,360 in self-employment income or wages. The number of work credits you need to qualify for Social Security Disability Insurance (SSDI) depends on your age and when you became disabled. You may need roughly 40 credits to qualify, but younger workers may not need as many. For example, disabled workers aged 31 to 42 may only need 20 credits to qualify, while a worker who is 52 may need 30 credits. There are also strict time frame requirements for when a worker last received work credits and when they lose eligibility known as the date last insured (DLI). Since applying for disability benefits from the Social Security Administration can be complex and the requirements can be confusing, it may be best to obtain the professional services of a disability attorney to improve your chances of a successful claim.
4. Are Social Security Disability Benefits Taxed?
Some disabled workers who earn Social Security Disability Insurance (SSDI) benefits may be subject to tax on a portion of their benefits. The percentage that is taxed and the tax rate depend on individual income levels. The Social Security Administration (SSA) will send beneficiaries a Social Security 1099 (SSA-1099) Benefit Statement each year they receive benefits. Noncitizens outside the U.S. who received or paid for benefits may receive form SSA-1042S. This form will show how much you received in benefits as well as what amount to report on your tax return with the Internal Revenue Service (IRS) each tax year. Depending on income levels, SSDI benefits may not be taxed, might have 50% taxed, or possibly 85% taxed. This portion that is taxable is then taxed at the individual’s marginal tax rate for a given year. Tax rates for 2019 can range from 10%-37%, depending on income and marital status. For example, an individual with SSDI and combined income over $25,000 may be taxed on 50% of the disability benefits received at the marginal income tax rate of 12 percent.
5. What Income Levels Trigger Tax on SS Benefits?
Generally, Social Security benefits will only be taxed if claimants have substantial additional income — for example, from a spouse that is working or passive income from investments or rental properties. To determine if your benefits will be taxed, calculate the total of your combined income, which is your adjusted gross income (AGI) plus nontaxable interest such as from municipal bonds, and then add 50% of your Social Security benefits. Compare this combined income to the base amount. This base amount varies based on marital status and if you filed jointly. Generally, those disabled individuals who earn under $25,000 will not face taxation. Individuals earning between $25,000 and $34,000 may owe taxes on 50% of their benefits. Individuals earning over $34,000 may owe taxes on 85% of their benefits. Claimants filing jointly with a spouse see slightly higher income levels. 50% of benefits will be taxed from $32,000 to $44,000 and 85% for combined income over $44,000. Those who qualify for Supplemental Security Income (SSI) generally do not have enough income to be taxed.
Determining combined income and calculating the percentage of your taxable benefits can be complicated. To ensure you are paying the right amount and taking the right exemptions, deductions, and credits it’s a good idea to consult with a tax attorney.
6. Is Disability Back Pay Taxable?
The Social Security Administration requires a waiting period for disability payments of at least five months from the onset of the disability. The application process may also take time, especially if there are denials, appeals, and hearings. In some cases, a disabled worker may qualify for retroactive benefits which may be paid in a lump sum.
There are several taxation issues with back pay since these benefit amounts can be substantial. The lump sum may be taxable, and it may also push you into a higher tax bracket. The IRS will not usually penalize a beneficiary for receiving past-due benefits from previous years, meaning you may not need to file amended income tax returns for those previous years. The SSA-1099 from the Social Security Administration will list the lump sum amounts attributed to the prior year. Calculating the portion of the back pay that is taxable can be complicated and it may be best to consult with a professional. Those who receive Supplemental Security Income back pay may receive installments every six months. You can find more information from the IRS Publication 915 which discusses the taxation of Social Security benefits.
7. Will My State Tax my SSDI Benefits?
Depending on where you live, your state may tax your Social Security disability income. Montana, Utah, and New Mexico impose income tax on benefits. Connecticut, Colorado, Kansas, and Missouri consider your adjusted gross income (AGI) and tax your SS benefits based on certain thresholds. In contrast, some states do not impose income tax such as Alaska, Florida, Kentucky, Nevada, Texas, and Washington.
Other states exempt Social Security benefits from taxes while still imposing tax on other sources of income. These states include California, Oregon, Idaho, Hawaii, Ohio, and Oklahoma, as well as 24 other states. Other states may tax at the same rate as the Federal government and IRS. Some U.S. territories also may tax your Social Security benefits. The percentage of your benefits that will be taxed and the rate at which they are taxed will vary by state. Some states offer exemptions and other programs for which you may qualify. You can check with your local taxing agency or state tax administrator.
8. How are Auxiliary Benefits Taxed?
Children or spouses of a disabled worker may be eligible for auxiliary or dependent’s benefits. The benefit amounts are based on the work and earning history of the insured worker if eligible. An insured worker is one who has earned enough work credits within a recent time frame. Spouses or even divorced spouses, in some cases, may qualify to receive benefits. Children and parents may also qualify for benefits if they depend on the insured worker for support. These benefits will be taxed on the recipient’s income taxes and not the income taxes of the insured worker. For example, a child who is a dependent of a disabled worker may be required to report the benefits received on an income tax return each year.
9. What is Voluntary Tax Withholding (VTW)?
Individuals who receive SSDI may be taxed on a portion of their benefits. These beneficiaries of Social Security programs can choose to have a portion of their benefits withheld. This can help avoid tax payments, such as estimated taxes due quarterly. You can file IRS Form W-4V with your local Social Security Office to elect to have a percentage of your monthly benefit withheld. The withholding rates can be 7%, 10%, 15%, or 25%. If you already have filed a W-4V and no longer wish to withhold for taxes, you can file a new W-4V with a 0% rate request.
10. Can the IRS Seize Disability Benefits to Settle a Tax Debt?
The IRS can seize many of your assets to settle a tax debt including your Social Security Benefits. The Federal Payment Levy Program (FPLP) allows the Internal Revenue Service to levy up to 15 percent of your SS Disability benefits to satisfy an outstanding tax debt. The IRS will notify you of intent to levy first and provide information on an appeals process. The IRS will not levy your Supplemental Security Income (SSI) benefits. If you find that you owe a tax debt and are in danger of having your SSDI benefits levied, you do have options but only a limited amount of time to act. A tax attorney can help negotiate with the IRS on your behalf and you may be able to obtain a payment arrangement or Offer in Compromise.
Social Security Disability
Disabled workers and those who need supplemental income can benefit from the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs which are offered by the Social Security Administration. Eligible individuals can apply online, by phone, or in person to receive Social Security disability payments, but it may take time to receive approval. In many cases, qualified beneficiaries of these programs will receive back pay. If you face taxation issues, you may require assistance from an experienced disability attorney or tax professional.
Social Security benefits may be taxed depending on the income levels of the recipients. In some cases, the state the taxpayer lives in may levy additional taxes on benefits. Those receiving Social Security benefits can choose to have a portion of their monthly benefits withheld to avoid estimated taxes. It is also important to know that the IRS may levy a portion of Social Security benefits to satisfy outstanding tax liabilities. Due to the complex nature of Social Security benefits, the application and appeals process, and possible taxation issues, it is generally a good idea to consult with a knowledgeable and professional lawyer. Acadia Law Group can help streamline the process and obtain the best possible outcome for your case. For more information on how we can help you, reach out today for a free consultation.