Are My Social Security Disability Benefits Taxable?
When someone is awarded Social Security disability benefits and begins receiving monthly checks, they often ask, “do I have to pay taxes on this income?” The answer is…it depends. As a general rule, disability benefits are considered to be income subject to taxation, according to the Internal Revenue Service. However, many individuals receiving disability benefits do not actually pay income taxes because they do not have any other source of income. As a result, they are in a lower tax bracket and often have zero tax liability. Nevertheless, roughly one-third of all Social Security disability recipients wind up paying some amount in taxes. This is usually because their spouse is earning a separate income, or another member of the household is generating an income.
The tax implications associated with disability benefits are also impacted by which state you reside in. This article examines both federal and state taxes associated with Social Security disability benefits.
Social Security Disability Benefits and Federal Taxes
Your disability benefits may be subject to federal tax, depending on the total income of your household (which means your spouse’s income will be included as well). For example, you will likely have to pay federal taxes on a portion of your disability benefits if:
- You are married;
- You file federal taxes jointly; and
- You and your spouse earn more than $32,000 per year in income (including half of your SSDI benefits)
Similarly, a portion of your disability benefits will be subject to federal taxes when you are single and earn more than $25,000 in income per year (including half of your SSDI benefits).
If your Social Security disability benefits are subject to federal taxation, do not fret about the possibility of a huge tax bill. You will be taxed at the marginal income tax rate. Basically, this means your tax rate would not be 50 or 85 percent of your benefits. The tax rate on your benefits would probably be closer to 15 or 25 percent. However, if you have a higher household income, you may be required to pay around 35 percent on your disability benefits.
Taxation of Social Security Disability Backpay
Large lump-sum payments of back payments of SSDI (payments of benefits for the months you were disabled but not yet approved for benefits) can bump your income up for the year in which you receive them, which can cause you to pay a bigger chunk of your backpay in taxes than you should have to. To avoid losing part of your backpay this way, you are allowed to apply the SSDI benefits owed from a prior year to prior tax returns, lowering your income for the year you receive the lump sum. For example, if you were entitled to disability benefits for 22 months before you received your back pay, you could amend your tax returns for two prior years to claim some of the income in those years instead of the current year. You should ask a lawyer or CPA for help on this. For more information, read our article on how Social Security disability backpay is taxed.
Social Security Disability Benefits and State Taxes
In addition to federal taxes, it is important to be cognizant of potential state taxes on your disability benefits. Generally, most states opt not to tax Social Security disability benefits, but some do. There are some states that fully tax disability benefits, some states that do not levy any taxes on disability benefits, some states that only tax disability benefits when an individual’s income is above a specific threshold, and some states that mirror the federal tax policy on disability benefits.
States That Tax Social Security Disability Benefits
Three states fully tax Social Security disability benefits. Here is an overview of those states:
- Montana – The Treasure State levies full income taxes on Social Security benefits, including disability benefits.
- Utah – The Beehive State imposes taxes on disability benefits. However, there are certain tax credits available to residents that is based on age, filing status, and household income.
- New Mexico – The Land of Enchantment has no state tax exemption for Social Security disability benefits. Nevertheless, it does offer a small exemption for individuals who have a low household income or are older than age 65.
States That Tax Social Security Based on Income
Certain states tax disability benefits based upon an individual’s federally adjusted gross income. In addition, some states exempt recipients of disability benefits when their incomes are below certain income thresholds. Here is an overview of those states:
- Colorado – People younger than age 65 who receive Social Security disability benefits can exclude up to $20,000 of benefits from their income that is subject to state taxation. Disability benefit recipients who are age 65 and older have the option to exclude up to $24,000 of benefits from their income that is subject to state taxation. In addition, whatever amount of Social Security income not taxed by the federal government does not get added to your adjusted gross income when determining your state tax liability.
- Connecticut – If your adjusted gross income is under $50,000, then you are exempt from paying state taxes on your Social Security disability benefits. If you are married and file taxes jointly, your disability benefits are exempt from state taxation when your federal adjusted gross income is under $60,000.
- Kansas – If you have a federal adjusted gross income under $75,000, your Social Security disability benefits are not subject to state taxes.
- Missouri – If you have an adjusted gross income under $85,000, your Social Security disability benefits are not subject to state taxes.
States That Mirror the Federal Government in Taxing Social Security Disability Benefits
The following six states impose taxes on Social Security disability benefits at the same tax rate as the federal government:
- North Dakota
- Rhode Island
- West Virginia.
States That Do Not Tax Disability Benefits
Approximately 30 states do impose any income taxes on Social Security disability benefits. Here is a list of those states:
- Washington, D.C.
- New Hampshire
- New Jersey
- New York
- North Carolina
- South Carolina
Learn More About Your Eligibility for Disability Benefits
If you or a loved one has a disability and cannot work, you may be eligible for social security disability benefits that can help pay for your essential items such as food, housing, and medical expenses. To help assess your eligibility for these benefits, fill out the free evaluation form on this page.