It seems that taxes confused even one of the brainiest guys in history—Albert Einstein—who famously said: “The hardest thing in the world to understand is taxes.” The American income tax system is complex and confusing, but here are some basic guidelines to help you understand how your disability payments are taxed and some ideas on how to reduce your tax liability.
H&R Block, the national tax preparation company, points out that “all Social Security benefits are taxed in the same way. This is true whether they’re retirement, survivors, or disability benefits.” But for the majority of people, Social Security benefits are not taxable. According to Social Security, “some people who get Social Security have to pay taxes on their benefits. About one-third of...current beneficiaries pay taxes on their benefits. “
Typically disability recipients who pay taxes on benefits are those receiving Social Security Disability Insurance (SSDI) payments. Supplemental Security Income recipients seldom pay income taxes, because if they have sufficient income to have to pay taxes, they don’t qualify for SSI.
So when do you have to pay taxes on SSDI benefits? In general, if you or your spouse has another source of substantial income you will owe money to the tax man.
According to H&R Block, none of your SSDI is taxable if one-half of your SSDI plus all your other income is less than:
• $25,000 if you filed as single, head of household, or married filing separately and you and your spouse lived apart all year.
• $32,000 if you’re married filing jointly.
Up to 50% of your SSDI is taxable if your income is more than those amounts.
Also, up to 85% of your SSDI is taxable if one-half of your SSDI plus all your other income is more than:
• $34,000 if you filed as single, head of household, or married filing separately and you and your spouse lived apart all year.
• $44,000 if you’re married filing jointly.
If you are married and file a separate return and you and your spouse lived together at any time during the year you will probably owe taxes on your benefits.
State income tax levied on Social Security income varies from state to state. Kiplinger Magazine reports that “Nebraska taxes Social Security income to the extent it’s taxed on the taxpayer’s federal return. A couple of years ago Iowa implemented a gradual phase-out of its tax on Social Security income, so now all Social Security benefits are free of state taxes.
If you received a lump sum payment of disability benefits in 2016 you can lower the amount of taxes owed by spreading them out. The IRS allows you to spread the taxes on lump sum benefits over the previous tax years to which the benefits apply. You can do this on your current year return and do not have to file amended returns.
Social Security disability attorney fees are tax deductible in some cases. The National Organization of Social Security Claimants Representatives (NOSSCR) says, “If a taxpayer discovers that some of the Social Security lump sum–when added to regular benefits received in the same year–turns out to be taxable, the attorney fee may be deducted from income, but only to the same extent that Social Security is taxed.” But to take this deduction, you must file an itemized return and this limited deduction is subject to the 2% of adjusted gross income ceiling on miscellaneous itemized deductions.
Please note that this article gives general income tax guidance, but should not be used as tax advice in individual cases. You should always seek guidance from a competent tax professional.