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How to Know If You Earn Enough to Owe a Federal Taxation on Your Benefits

How to Know If You Earn Enough to Owe a Federal Taxation on Your Benefits

The minimal income amount varies according on your filing status and age. For example, in 2021, the minimum for single filing status if under the age of 65 is $12,550. If your income is less than that amount, you are not required to submit a federal tax return. Other filing statuses depend on annual income amount plus marital status and ages and the amount of period you worked under substantial gainful activity.

The amount of "provisional income" you report, as well as whether you file alone or jointly, influence whether you owe federal income tax while receiving Social Security disability. Your AGI, any tax-free interest earned, and half of your Social Security disability benefits constitute your provisional income.

If your primary source of income is disability benefits, you almost definitely will not owe any federal income tax. However, if you file as an individual with a provisional income of $25,000 to $34,000, up to 50% of your disability benefits are taxable income. If your pre-tax income exceeds $34,000, 85% of your benefits are taxed.

You may be liable to pay taxes on up to 50% of your disability payments if you are married filing jointly and have a combined income of more than $32,000. If your total income exceeds $44,000, you may be taxed on up to 85% of your disability benefits. Remember that the 50% and 85% rates apply to your taxable income, not your marginal tax rates. Any taxable disability income will be taxed at your usual marginal rate (often between 10% and 28%).

Of course, you may owe state taxes on your disability backpay, but most states do not tax Social Security disability benefits. Over a dozen states, on the other hand, provide tax advantages, either in the same way as the federal government or only if you make more than a certain amount of adjusted gross income.

Social Security Disability Tax Withholding

Only a tiny proportion of Social Security Disability Insurance (SSDI) claimants are obliged to pay federal income taxes each year, typically because a spouse works or the individual has passive income from rental properties or investments. In terms of Supplemental Security Income (SSI), practically no SSI participants earn enough to owe income tax due to SSI income limits. As a result, for tax purposes, Social Security does not withhold any amount of your disability lump sum or monthly payment.

If you expect to owe federal income taxes on your disability payments and want to avoid paying a large amount when you file your taxes, you can use IRS Form W-4V to set up Voluntary Tax Withholding (VTW). (Please keep in mind that Line 6 of the form only allows you to deduct 7%, 10%, 15%, or 25% of your monthly benefit.) This form should be filled out and delivered to your local Social Security office. However, before creating VTW, you should consult a tax consultant because tax withholding is typically unnecessary.

For more information on withholding taxation on your social security benefits, you can seek legal help from our expert disability attorneys at The Law Office of Irene Ruzin. 

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Friday, 29 March 2024