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Are Social Security disability insurance benefits taxable?

Social Security disability insurance benefits are taxable, but only if you earn above certain levels of income.

Social Security disability insurance (SSDI) is a government program that pays you a monthly benefit when you’re disabled and can’t work. The average SSDI benefit payment is $1,198.54.

The monthly benefit is taxable, but only if you earn above a certain income level. Each year, the Social Security Administration will send you a Form SSA-1099, which includes the total amount of Social Security benefits you received that year. That number will have to be reported on your taxes. However, only a portion of the Social Security benefits is taxable.

Social Security disability insurance is one of several social benefits programs offered. Since we’re an insurance broker, we’ll focus on SSDI, but note that all Social Security benefits may be taxable except for Supplemental Security Income (SSI). Read on to learn more about paying taxes on Social Security disability insurance benefits:

Calculating the tax liability on your Social Security benefits

If you didn’t earn any income during the year, or if your Social Security benefits do not exceed the base amount for your filing category, then none of your Social Security benefits are taxable.

But if do earn income and while receiving Social Security benefits, up to 50% of your benefits are taxable if your income exceeds a certain base amount. The IRS defines this base amount as:

  • $25,000 for people filing as an individual, head of household, qualifying widow or widower, or married couples filing separately and who live apart from each other
  • $32,000 for married couples filing a joint return, even if one spouse isn’t receiving Social Security benefits
  • $0 for married people who live together but file separately

However, the IRS also uses adjusted base amounts for people who earn higher benefit amounts or income. These adjusted base amounts are calculated by combining one-half of the Social Security benefits you receive plus your income for that year. If you exceed them, 85% of your Social Security benefits are taxable.

  • $34,000 for people filing as an individual, head of household, qualifying widow or widower, or married couples filing separately and who live apart from each other
  • $44,000 for married couples filing a joint return, even if one spouse isn’t receiving Social Security benefits
  • $0 for married people who live together but file separately

But whether up to 50% or up to 85% of your benefits are taxable, your tax liability is assessed at the same marginal tax rate as your usual income.

SSDI back payments

The SSDI application process can drag on for a very long time. Most people are rejected on their first attempt, and appeals can mean months or even years before approval. However, once you are approved, you may be owed a back payment for the amount of SSDI you should have been receiving during the application process.

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Takeaway

Disability insurance replaces around 60% of your pre-tax income while you're disabled and can't work.

The back payment is paid out as a lump sum. If you report the whole amount of the back payment on your taxes, your taxable income could increase dramatically, leaving you with a much higher tax burden. To avoid this, file amended returns for the prior years covered by the back payment, and report only the remaining amount for the current tax year.

Income limits for SSDI benefits

Note, however, that if you can earn an income, you may no longer qualify for Social Security disability insurance. That’s because if you can perform what the Social Security Administration describes as “substantial gainful activity” (SGA), meaning work that results in a monthly income above a certain amount, then you’re no longer considered disabled enough to qualify for SSDI benefits.

As of 2018, nonblind people are considered to be performing SGA if they earn $1,180 or more per month. For blind people, the SGA limit is $1,970 per month.

Exemptions for victims of terrorism

If your disability was caused by a terrorist attack, whether domestic or international, no portion of your disability benefits is taxable.

Exemptions for Supplemental Security Income

Supplemental Security Income, another program of the Social Security Administration, works in tandem with SSDI to pay benefits to disabled or elderly people who have lower incomes. No portion of Supplemental Security Income is taxable.

How to report SSDI benefits on taxes

Box 5 of Form SSA-1099, titled “Social Security Benefit Statement,” shows your net benefits received for the relevant tax year. Your net benefits are your benefits minus any benefits you had to repay for that year.

You report the number in Box 5 on your Form 1040 or Form 1040A (line 20a or line 14a, respectively).

If you elected to voluntarily withhold taxes from your Social Security benefits, that amount will appear in Box 6 of form SSA-1099.

Long-term disability insurance

Long-term disability insurance (LTDI) is a private insurance product that will pay you disability insurance benefits if you become sick or injured and can’t earn an income. Unlike Social Security benefits, which are free to you, LTDI must be paid for with monthly or annual premiums.

Compared to SSDI, long-term disability insurance benefits are typically much higher (they replace approximately 60% of your pretax wages) and much easier to qualify for. You also don’t need to pay taxes on your LTDI benefits if you paid your premiums with your after-tax income. A licensed representative at Policygenius can help you pick a benefit amount that works within your budget and provides you with more coverage than you’d get from SSDI.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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