November 30, 2016
Many people who receive Social Security disability benefits may not know what type of benefit they receive. There are two types of Social Security disability benefits: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Although both of these programs are administered by the Social Security Administration, the qualifications for each program are different.
Do I Have to Pay Taxes on Social Security Disability?
Because Supplemental Security Income is need-based, those who are enrolled in that program are likely to not have a high enough combined income (discussed below) to have to pay taxes.
Social Security Disability Insurance, on the other hand, is not a need-based program. Applicants qualify by having worked in jobs covered by Social Security for a number of years. Sometimes, persons who are receiving SSDI will have a high enough combined income that they need to pay taxes on a portion of their Social Security disability benefits.
Calculating your “Combined Income”
The first step to determining whether you have to pay taxes on Social Security disability benefits is to calculate your combined income. Combined income is a calculation based on adding three different factors:
1) Your adjusted gross income (AGI) – this is your total gross income for the year minus certain “above-the-line” deductions. These deductions can include individual retirement account (IRA) contributions, alimony payments, and retirement plan savings for the self-employed.
2) Nontaxable interest – this could include interest on tax-exempt bonds or tax-exempt mutual funds.
3) One half (1/2) of your Social Security disability benefits
Income “Base Amounts” and Taxation of Social Security Disability
After calculating your combined income, the next step is to compare your combined income to certain base amounts. These base amounts are set by the Internal Revenue Code and are thresholds which determine whether – and if so, how much – you need to pay tax on your social security disability.
If you file your federal tax return as an individual and your combined income is less than $25,000, you will not need to pay taxes on your Social Security disability. If your combined income is between $25,000 and $34,000, you may need to pay income taxes on up to half (50 percent) of your Social Security disability benefits. If your combined income is greater than $34,000, you may need to pay income taxes on up to 85 percent of your benefits.
If you file a joint federal tax return and you and your spouse have a combined income that is less than $32,000, you will not need to pay taxes on your Social Security disability. If your combined income is between $32,000 and $44,000, you may need to pay income taxes on up to half (50 percent) of your Social Security disability benefits. If your combined income is greater than $44,000, you may need to pay income taxes on up to 85 percent of your benefits.
Tax Rate on Social Security Disability Benefits
If you fall above one of the base amounts mentioned above, you will likely have to pay tax on some of your Social Security disability. For example, if you file your return as an individual and your combined income is $30,000, you may need to pay taxes on up to half of your Social Security disability benefits. Luckily, this does not mean that you need to give the government half of your Social Security disability benefits, it simply means you need to pay tax onhalf of your benefits.
How much tax you need to pay is determined by something called the tax rate. Tax rates can range from 10% to almost 40%. For federal taxes in the United States, your tax rate is determined by how much income you make. This may sound confusing, but once you understand how the brackets work, the concept is relatively simply.
For individual filers for the 2013 tax year, income you have up to $8,925 is taxed at a rate of 10 percent. Income between $8,925 and $36,250 is taxed at a rate of 15%. Income above this is taxed at progressively higher rates. Luckily, the Internal Revenue Service has published an easy-to-use table to help you figure out your tax rate based upon your income.
For an individual with a combined income of $30,000, they would likely only need to pay taxes of 10 to 15 percent on up to half of their Social Security disability benefits.
What about State Taxes?
Most states provide a full exemption for Social Security disability benefits. This means that these states do not impose a state income tax on the benefits. Some states mirror the same way that the federal government taxes Social Security disability benefits. These states may impose a state income tax on the benefits, which is typically a much smaller tax rate than the federal income tax rate. Other states, such as Florida, do not have a broad-based income tax at all. Social security disability benefits would not be taxed in these states. TaxFoundation.org has compiled a helpful map of how each state taxes Social Security benefits.
At The Rochester NY Social Security Disability Law Offices Of Kenneth Hiller, PLLC, we can help you to answer these questions and fight to get you the benefits you deserve. Call us today.