When a person is approved for Social Security disability benefits, they could be liable for taxes. They can find themselves with tax obligations if they have other sources of income over and above their disability payment.
If their spouse earns a larger income, that too can cause additional taxation.
It is important that people who collect disability benefits file with the IRS. This also is irrespective of whether the benefits are from Social Security or from disability insurance. Rules change somewhat if the benefit plans are public or private. A tax consultant should help you make these decisions to be sure you are in compliance with the law, just in case your understanding of the rules is not entirely correct.
Benefits can be taxed when:
・ A disabled worker who receives disability benefits continues to earn income from interest on savings accounts, pensions, dividend stocks. This includes, again, if joint income includes a substantial spousal income.
・ The rules with respect to disability benefits are identical to those of social security benefits. If a claimant is single, their income plus ½ of their disability money adds up to $25,000 and less than $34,000, then up to 50% of their benefits are taxable. If the amount surpasses $34,000, then taxes increase up to 85% on their benefits.
・ Married couples filing jointly. When combined income is added to benefits received, from between $32,000 and $44,000, then 50% of the benefits are taxable. Incomes higher than $44,000 will get taxed at the 85% rate on their benefits.
・ If the beneficiary is married but filing a separate tax return, they most likely will pay taxes on their benefits. This is because on the 1040 tax form, the filer’s combined income is the total sum of their adjusted gross income, any non taxable interest plus half of their Social Security benefits. In this case, the base amount for taxation purposes drops from $32,000 down to $0 on separate returns. The filer will also lose other tax benefits that are given to joint tax return filers.
For disability insurance benefit payments, the IRS will either tax the premium paid or benefits that were paid. In most cases, the amount of taxes actually owed is far less. And recipients of disability benefits can also have the taxes automatically withheld as an easier alternative. The beneficiary can use Form W-4V to allow the IRS to withhold a percentage (not amount) of their benefits towards taxation.
For more information refer to the IRS’ Pub 915 which provides complete information on how to calculate whether or not Social Security disability payments are taxable or not, and get professional help if you have any doubts.
