Social Security disability is taxed, although most recipients do not pay taxes on it.
Social Security disability benefits (SSDI) are taxable, but most disability applicants do not pay them since they have little other income. However, around one-third of Social Security disability recipients pay taxes, primarily as a consequence of their spouse's or other family income. Supplemental Security Income (SSI) benefits are not taxed.
The Federal Government Taxation of Social Security Disability Benefits
This is how it operates. If you and your spouse make more than $32,000 per year (including half of your SSDI benefits), a portion of your SSDI benefits will be taxed.
If you are a single individual with an annual income of more than $25,000 (including half of your SSDI benefits), you will be taxed on a portion of your SSDI payments.
Your income determines how much of your SSDI benefits are taxed. Here's a chart with monthly income data that illustrates if your SSDI benefits will be taxed and the maximum amount of SSDI that might be taxed. It might be difficult to calculate the exact amount of SSDI benefits that would be taxed if you earn more than $2,083 per month. The calculations may be performed using the IRS Form 1040 tax return or the Social Security tax calculator.
Remember that if your disability benefits are taxable, they will be taxed at the same rate as your personal income. In other words, rather than 50% or 85%, your tax rate would most likely be between 15 and 25% of your benefits. Those with higher wages (where benefits are taxed at 85%) may incur a 28% benefit tax. The rate of taxation is the same as it is for your other earnings.
Social Security Disability Backpay Taxation
Large lump-sum SSDI backpay payments (payments of benefits for months you were disabled but not yet approved for benefits) may raise your income for the year you receive them, requiring you to pay a higher amount of your backpay in taxes than you should.
To avoid losing some of your backpay, you can apply SSDI payments from a previous year to earlier tax returns, lowering your income for the year you receive the lump sum. For example, if you were eligible for disability payments for 22 months prior to getting your back pay, you might amend your tax returns for the previous two years to claim some of your income from those years rather than the current year. You should consult with an expert disability lawyer or a CPA about this; it is complicated.