What You Need to Know About Disability Income and Tax Preparation

disabled woman on her laptop
August 25, 2022

 Starting in the 1930s, the American government implemented programs designed to help restore the economy and lift the country out of the Great Depression. In an effort to provide a financial safety net, the Social Security program was designed for older Americans who had paid into the Social Security system during their working years.  

 Additionally, the government could also provide financial aid to American workers who paid into the Social Security system and then qualified because of their disabilities.  Unlike the Social Security system, these former working citizens did not have to be of a particular age to receive benefits. This disability assistance is provided through the Social Security Disability Insurance (SSDI) program. 

 Americans Receiving Social Security Disability Insurance  

This government program currently helps provide financial support to millions of Americans every year. With the CDC reporting 61 million disabled adults in the United States, Americans count on these programs to provide for their families when a disability has hindered their ability to work. Like most government programs, there are many strict qualifiers, forms to submit, and records to keep track of when considering eligibility. One of the most confusing components of receiving government assistance through programs such as SSDI is understanding if and when this income is taxable.  

 Tax Guidance from our Tax Professionals  

Navigating the SSDI tax process is usually more than most Americans can handle with confidence and accuracy. Relying on tax professionals who can assist with your personal accounting will alleviate a lot of uncertainty and insecurity related to taxable SSDI benefits. Our qualified team at Waters Hardy has experience in providing accounting services that focus on the confusing tax implications of Social Security Disability Insurance. Here are some of the key points that you need to understand about SSDI.  

 What is Social Security Disability Insurance? 

 If you work long enough, pay taxes, and meet certain income thresholds during your working career, you can participate in Social Security programs after retirement. You’ve already paid into this system, so you can expect to receive financial benefits from this system when you’ve met the requirements. The longer you work and the more income you earn, the better your benefits will be.  

 In other cases, American workers sometimes develop a serious or long-lasting medical condition that prevents them from working for weeks, months, or years. If they haven’t worked long enough to receive Social Security benefits, they may qualify for financial assistance through the Social Security Disability Insurance program.  

 Funded by payroll taxes, SSDI is a social insurance program that was designed to aid American workers who find themselves unable to stay employed due to a disability. With this program, disabled workers who paid into the system during their working years can rely on that same system to provide for themselves and their families in a time of need.  

 Social Security Disability Insurance Qualifiers 

 The SSDI program’s administrator, the Social Security Administration (SSA), allows coverage benefits for disabled workers who meet certain eligibility requirements.  

  • An individual must have paid into Social Security benefits. 
  • Must have worked for at least 5 out of the last 10 years before the disability occurred. 
  • The worker is impaired by a serious physical or medical condition that has lasted, or is expected to last, at least one year, or result in death. 
  • The condition must significantly limit your ability to do basic work such as lifting, standing, walking, sitting, and remembering for at least 12 months. 
  • The condition must prevent you from doing the kind of work you did previously, and based on your age, education, experience, and transferable skills, you cannot perform other work. 

 Taxable Social Security Disability Insurance Benefits 

 Whether your SSDI benefits are taxable will depend on where you live and your total income. Your income threshold is based on your tax filing status. If your total income is below the threshold set by the IRS, then you can avoid paying taxes on your SSDI benefits. If your total income falls above the threshold, then your SSDI becomes taxable. To determine your total income, add one-half of your SSDI benefits to all other sources of income, including tax-exempt interest, dividends, or spousal income. 

 Social Security Disability Insurance Income Limits 

 If your total income exceeds the following amounts, then your SSDI benefits are taxable.  

  • $25,000 for single, head of household, qualifying widow(er), and married filing separately (did not live with spouse) taxpayers 
  • $32,000 for couples married and filing jointly 
  • $0 for married couples filing separately who lived together at any time during the tax year 


How Much Will You Pay in Social Security Disability Insurance Tax? 

 If your SSDI benefits are taxable, the following rates below will apply. 

  • Single Filer
    • Up to 50% of benefits are taxable if your income falls between $25,000 and $34,000 
    • Up to 85% of benefits are taxable if your income exceeds $34,000 
  • Married Couples Filing Jointly 
    • Up to 50% of benefits are taxable if your income falls between $32,000 and $44,000 
    • Up to 85% of benefits are taxable if your combined income exceeds $44,000 

 States that Tax Social Security Disability Insurance Benefits 

 13 states currently tax SSDI benefits to some degree, with similar income criteria to the ones used by the IRS to determine how much, if any, of your disability benefits are taxable. 

  • Colorado 
  •  Connecticut 
  • Kansas 
  • Minnesota 
  • Missouri 
  • Montana 
  • Nebraska 
  • New Mexico 
  • North Dakota 
  • Rhode Island 
  • Utah 
  • Vermont 
  • West Virginia 

 Seek Professional Social Security Disability Insurance Tax Assistance 

 If you are having trouble understanding your SSDI benefits and whether those benefits are taxable, consider working with a reputable tax planning and compliance team.  Our tax professionals can provide insight and guidance in determining whether your SSDI benefits are taxable. We can also assist in filing your tax return.  

 Our tax experts at Waters Hardy have the knowledge and experience to handle all your tax needs with efficiency and reliability. Contact us today and find out how we can help with all your Social Security Disability Insurance benefit needs. 

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