Social Security Disability Income (SSDI) is a federal program that pays monthly cash benefits to disabled adult Americans. The amount varies depending on the recipient's work history and the total income amount of his household. Because it is a source of unearned income, the Internal Revenue Service (IRS) may count SSDI payments as taxable income, depending on the recipient's overall financial situation.
Social Security Disability Insurance is a social insurance program run by the United States government. Its recipients are tax-paying American citizens or legal residents whose health care providers have diagnosed them with permanent or long-term disabilities. SSDI recipients must have worked enough years to have qualified for Social Security upon reaching retirement age. For individuals born after 1926, this is a minimum of 10 years of working and paying Social Security taxes. However, SSDI recipients don't have to be old enough to retire in order to qualify for SSDI. They only need to have worked the minimum required years as taxpayers. Individuals with disabilities who have not worked enough to qualify for retirement benefits upon reaching retirement age, such as disabled minors, do not qualify for SSDI, but instead must apply for Supplemental Security Income.
When SSDI Is Your Sole Source of Income
Almost without exception, if SSDI payments are your only source of income for the year, the IRS will not require that you file an income tax return for the year. The taxable income limits for federal benefits payments are $25,000 per year for individuals and $32,000 per year in combined incomes for married applicants filing jointly. If your SSDI payments are your only source of income and your income total doesn't exceed this amount, you will likely not have to file an income tax.
However, you may still want to have a tax return prepared by a tax professional. Even if the IRS doesn't require you to file, you may benefit from filing a tax return anyway. If you file a tax return, you may discover you're eligible for tax exemptions and other types of tax credits that entitle you to receive a refund. Without filing a tax return, you can't receive any refunds for which you may be eligible.
SSDI and Other Household Income
If you are an SSDI recipient who also works part-time, or you receive other unearned income such as rent from a rental property or payments from a trust fund, you must file a tax return if your total household income exceeds $9,750 as a single tax filer. If you're married and filing jointly, and you and your spouse's income exceeds $19,500 combined, you must also file a tax return.
In general, the IRS treats SSDI income as regular Social Security income for tax purposes. If your income exceeds the allowable limits, up to 85 percent of your SSDI benefits may be taxable, depending on your total household income and filing status. If this is your situation, the process of filing taxes can be complicated, and it may benefit you to consult with a tax professional to determine what your tax filing requirements are for the year.
SSDI Lump Sum Payments
The Social Security Administration may take months, even years to approve an SSDI applicant and begin mailing payments. When the SSA finally approves an application, it will typically send a retroactive lump payment for all the payments to which the applicant was entitled while waiting for the SSA to approve his application. Because of the length of time that the SSA sometimes takes in approving SSDI applications, this retroactive lump sum payment can be a rather large sum, and you must claim it on your tax return.
Many recipients of SSDI retroactive lump sum payments find this aspect confusing for tax purposes. You need to count the income as Social Security benefits for the current year in which you are filing. Though the lump sum may be a retroactive payment for previous years, you do not have to file an amended tax return for the years the lump sum covers. The IRS will only count the lump sum payment as income in the year in which you receive it.
Unfortunately, this may prove to be a tax liability and put your household income over the limits for those exempt from having to file tax returns or pay taxes for the year. However, the IRS allows many exemptions and credits for people who are filing SSDI, including any legal fees and professional services you employed while applying for SSDI. Consulting with a tax professional may prove beneficial when trying to figure out your total tax liability for an SSDI lump sum payment.
- Allsup: Taxation of Social Security Disability Income
- Internal Revenue Service Publication 915: Social Security and Equivalent Railroad Retirement Benefits
- Financial Web: Are Social Security Disability Benefits Taxable?
- HCV Advocate: Taxing Disability Benefits
- Allsup: Taxes and Social Security Disability Insurance (SSDI)