Are Social Security Disability Benefits Taxable?

Once you start receiving government benefits after a serious illness or injury, your first question may be ‘Is my Social Security disability taxable?’ The answer to this question is ‘It depends.’

What is Social Security Disability?

Social Security disability insurance is available to those who are unable to work in any profession for more than a year as a result of a debilitating illness or injury. For many people this becomes their only source of income after encountering a disability. When this is the case, the government benefits will not be taxable.

When Can Benefits Be Taxed?

In other cases, disabled workers may continue to earn income from pensions, interest on savings accounts, or dividends from stocks and other investments. Some have spouses who continue to earn a great deal of income. Disability benefits may be taxable in these situations.
The rules for disability benefits are the same as those of regular Social Security benefits. For single filers in the 2008 tax year, if all sources of income plus one-half of your disability money add up to more than $25,000, you will be taxed on your benefits. If you are married and file jointly, the threshold is $32,000. If you are married and file separately, there is no limit and all your benefits may be taxable.

Just how much of your benefits can be taxed are determined by the following rules: If you are single, and your income plus half the disability money is more than $25,000 and less than $34,000, then up to 50 percent of the Social Security benefits will be taxable. If the total is higher than $34,000, up to 85 percent of the benefits can be taxed.

For married couples filing jointly, up to 50 percent of disability benefits are taxable when combined income plus one-half of the benefits equals between $32,000 and $44,000. For incomes over that figure, the 85 percent tax rule will apply.
Here’s an example: a married couple make an annual income of $26,000, and receive $20,000 in disability benefits each year. Their income plus one-half of the benefits ($26,000 plus $10,000) equals $36,000, over the $32,000 limit for married couples. This means that a portion of the $4,000 difference will be subject to taxes.
The couple’s income falls within the 50 percent tax bracket for Social Security benefits. Tax laws state that they report the lesser of 50 percent of their benefits, which would be $10,000, or 50 percent of the difference between their income and the limit, which in this case would be $2,000 (half of the $4,000 difference.) Say the married couple is in the 15 percent marginal tax bracket. They would then end up paying taxes equal to 15 percent of the $2,000, which is $300.

Social Security disability benefits can be taxed under certain situations, but in most cases, the actual amount of taxes due is minimal. Recipients can even have those taxes automatically withheld from their benefits if they decide that is the easiest method.

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