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Tax Q&A: Are Your Social Security Disability Benefits Taxable?

ssitThe short answer is that they are taxable, but not in the same way as most other income. Several things can affect your taxes in this case: whether you have other taxable income, whether your benefits cover more than one tax year, and whether you also received workers’ compensation benefits.

Do you have other sources of income?

  • As a general rule, if Social Security is your only source of income then it is not taxable and you probably do not need to file a federal income tax return.
  • If you have other income a portion of your Social Security benefits may be taxable if half of your benefits plus your other taxable income exceeds $25,000 for a person filing individually or $32,000 for a couple filing jointly. For more information, view the Social Security Administration’s Benefits Planner.

Do your Social Security benefits cover more than one tax year?

Another factor that can affect your taxes is whether you received a large lump-sum check for retroactive benefits that could cover more than one year. In those cases, you will have a choice to make:
  • You can choose to treat these benefits as taxable in the year they were received, or
  • You can consider how you would have been taxed in the years in which the benefits were payable, if that amount would be lower. You would then just pay taxes on the lower amount. There is no need to amend prior tax returns when this choice is made.
Because Social Security benefits may be taxable, the SSA sends a 1099 form to everyone who receives benefits. When you get one of these, it is always best to consult with a tax specialist—such as a certified public accountant (CPA) or a lawyer who specializes in tax issues—to  see if you will owe taxes on any portion of that amount. If the 1099 includes money that was paid as retroactive payments for prior years, then the specialist will probably want to see the notice of award which SSA sends you explaining how they calculated your benefits.

Did you receive both workers’ compensation and Social Security benefits?

A third and final issue that sometimes confuses clients is when you have received workers’ compensation benefits and Social Security benefits at the same time. In this situation, the 1099 form may include money that the Social Security Administration (SSA) never actually paid you. This is because workers’ compensation benefits may have reduced the amount of Social Security benefits that can be paid. However, the tax code says that the Social Security benefits are taxable to the full extent before they are reduced because of workers’ compensation. If you are in any doubt about whether you owe taxes on your Social Security benefits, be sure to talk to a CPA, a tax attorney, or a free tax preparation service such as the IRS’s Volunteer Income Tax Assistance program or the AARP’s Tax-Aide program.

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