Are You Required to Pay Taxes for Social Security Disability Back Pay?

You have finally received the lump-sum payment for your disability. But before you cash the check, you’re wondering: do you have to pay taxes on these benefits, or is every last dime yours to keep?

Will You Have to Pay Taxes on Your Social Security Disability Back Pay?

While many beneficiaries are overjoyed to receive an additional payment for back pay benefits, they are also concerned about paying taxes on the lump sum. In order to find out if you will have to pay taxes on a lump sum back payment from Social Security, you should consider the following factors:

  • Will I have to pay federal income tax? Many beneficiaries who collect Social Security benefits do not make enough money to pay federal tax. Your tax liability depends on your income (including income from your spouse, if you file jointly), and any tax-exempt interest you have earned on investments or other property. If your only source of income is your Social Security disability benefits, you will likely not have to pay any federal income tax—so you will also not have to pay taxes on your disability lump sum amount.
  • How much of my back payment is taxable? Even if you are required to pay taxes on your back payment, you should know that you may only have to pay taxes on a portion of the total sum. For instance, if you are married and have a combined income over $32,000, you may be taxed on up to 50 percent of your disability benefits. If your combined income is over $44,000 you could be liable for taxes on 85 percent of your disability benefits.
  • Will I have to pay any tax penalties? While the Internal Revenue Service (IRS) often applies penalties to payments that are received after the tax filing year, the IRS does not penalize Social Security disability beneficiaries for receiving these lump-sum payments. If you owe taxes on your benefits, you will not have to file an amended tax return even if your benefits are post-dated to a previous tax year.

Calculating the amount of your tax liability for your lump sum payment is often a confusing process. Beneficiaries often over or underpay the amount of their taxes, causing further unnecessary financial struggles.

 

Sean D. Cuddigan
SSA and VA Disability Attorney in Omaha, Nebraska
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