Life can be difficult enough when you're disabled without the added hassle of a tax problem caused by your disability benefits. In many cases, your benefits check is tax exempt, although the type of plan, the amount of money you earn each year and the provider of benefits – as well as your state's tax code – ultimately determine if you owe taxes on your benefits. If you owe taxes, they're taxed at your regular income tax rate.
Social Security Disability Benefits
Only about 30 percent of beneficiaries who receive Social Security disability benefits owe taxes on their benefits, according to the Social Security Administration. Whether your benefits are taxable depends upon how much income you make. Individuals who earn more than $25,000 per year or married couples who earn more than $32,000 annually must pay taxes on their benefits. Additionally, spouses who file individual returns and live with their spouse must file regardless of their income level. Disability payments aren't considered income, so don't include them in your year-end tally.
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Worker's Compensation Disability Benefits
If you receive either short-term or long-term disability benefits from your state's worker's compensation insurance program, you don't owe taxes on the benefit amount you receive, as long as it's paid from the state agency. If you were reimbursed for medical expenses for a prior year, however, that amount may qualify as income in the tax year in which you received it.
Private Disability Pensions
If you retired on a disability pension provided by your employer – not a Social Security or worker's compensation program – you must report the disability pension as income each year until you reach normal retirement age. For example, if you retire on a disability pension when you're 58 years old, and your company's normal retirement age is 62, you pay federal taxes on the benefits for four years.
Private Disability Insurance
If you receive a disability check from a private insurer, it may be taxable. If the insurance premiums were arranged by your employer and are deducted from your paycheck before payroll taxes are calculated, the IRS requires you to pay taxes on those benefits when you receive them. If you receive a disability benefit from other plans you pay for on your own, or through post-tax payroll deductions, you already paid income taxes on the funds when you originally earned the money to pay for them, so they're not taxable.
The rules described above apply only to federal taxes, and your state's income tax laws may require you to pay taxes on benefits using a different set of standards. Most states base their definition of taxable income on the IRS's rules, so it's likely your state has the same guidelines mentioned above. Check with your state's department of revenue to determine its tax policies on each type of disability benefit.
- Social Security Administration: What You Need to Know When You Get Social Security Disability Benefits
- Bankrate; When Disability Benefits Are Taxed; George Saenz; November 2010
- Social Security Online; Paying Taxes on Social Security Benefits; April 2011
- Bankrate; Don't Worry About Disability Taxes; George Saenz; September 2007
- IRS: Publication 554 - Tax Guide for Seniors
- Bankrate; Do I Owe Taxes on Workers' Comp?; George Saenz; March 2004