Under some conditions, the federal tax rules consider Social Security benefits, including retirement and disability, as reportable income. There's no difference between retirement, disability, spouse or survivor's benefits in this regard. You need to go through a few calculations to figure out what portion of the benefit, if any, should be included in taxable income. Most Social Security disability benefits recipients don't pay taxes on them because they do not have much other income.
If you're unable to work due to a physical or mental disability, you may qualify for Social Security disability benefits (SSDI). You must be 18 years of age, and you must have paid into the Social Security system through payroll taxes. There are a minimum number of credits needed, depending on your age, to meet this qualification.
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Social Security grants one credit for every $1,510 in earnings (as of 2021), and allows a maximum of four credits a year. If you don't have sufficient credits, but are disabled, you can apply for Supplemental Security Income. SSI is a means-tested program, and there's a limit to the assets you can have and the income you earn to qualify.
The Disability Benefit Amount
Your SSDI benefit comes monthly, with the amount depending on your lifetime wage record, not on the degree or type of your disability. At the start of each year, in January, Social Security sends you a Form 1099-SSA to report the total amount of disability benefits you collected in the previous year. This information is also furnished to the Internal Revenue Service. SSI payments are not included in taxable income and so are not reported.
Consider also: Do You Pay Taxes on Social Security?
Reporting Disability Benefits
Your disability benefits may be taxable, depending on your filing status and the amount and type of other income you receive. To make this calculation, you add up any other income you received, including tax-free interest income, and 50 percent of your SSDI benefits. The result is known as "combined income." The combined income amount, and your filing status, determines what percentage of your benefits will be included in your taxable income.
Consider also: Do You Pay Taxes on Disability Payments?
Calculating Taxed Percentage of Benefits
If you're single and your combined income is less than $25,000, then your SSDI benefits are not included in taxable income. A combined income of between $25,000 and $34,000 means that 50 percent of your benefits are included in taxable income; combined income over $34,000 means 85 percent of your benefits are included.
If you're married and filing a joint return, then 50 percent of your benefits are included in taxable income if your combined income is greater than $32,000; the percentage rises to 85 percent if combined income is over $44,000. If you're separated but lived with your spouse at any time during the year, then the 85 percent rate applies to all income.
Most states do not tax SSDI, but a few do. These states use the same income brackets as the federal government.