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Reviewing tax liability with a Chicago disability lawyer

With the arrival of tax season, many Social Security Disability beneficiaries may wonder whether they owe taxes on their benefits. As a Chicago disability lawyer can confirm, in Illinois, SSD benefits are exempt from state taxes. However, SSD benefits may be taxed at the federal level. Since the Social Security Administration doesn’t automatically withhold taxes, some Illinois beneficiaries may owe federal taxes on their benefits.

SSD tax guidelines

Many beneficiaries are not subject to paying taxes on their benefits because of their low incomes. However, beneficiaries with other sources of income may owe taxes on their benefits. The Internal Revenue Service determines tax liability by adding half of a person’s SSD benefit amount to other personal income. This income could include dividends, pensions and passive earnings.

If this income figure exceeds certain thresholds, a beneficiary may have to pay taxes on SSD benefits. However, the IRS never taxes full benefit amounts. Instead, the IRS taxes proportions of benefits based on the beneficiary’s income, with brackets divided as follows:

  • People who are single, widowed or heads or household don’t pay any SSD taxes if their monthly income falls below $2,083. People who are married and filing jointly don’t pay taxes on SSD benefits if their income is less than $2,666.
  • Individuals with income between $2,084 and $2,833 pay taxes on 50 percent of their SSD benefits. Married couples with income between $2,667 and $3,666 pay taxes on 50 percent of their benefits.
  • Individuals and married couples with income exceeding these thresholds pay taxes on 85 percent of their benefits.

In each case, Social Security Disability benefits are taxed at the same marginal rate that other income is taxed at.

Back payment taxation

SSD back payments, which cover months when a person was disabled but not approved for benefits, are also taxable. As any Chicago disability lawyer knows, many beneficiaries initially receive back payments due to claim processing delays. These individuals might worry that a lump sum back payment will bump them into a higher tax bracket. Fortunately, beneficiaries can assign overdue benefits to prior years.

This reassignment lets beneficiaries avoid penalties for receiving their benefits during one year. The IRS provides a special form that allows beneficiaries to reapportion back payments to the correct years. Beneficiaries who use this form do not have to file amended returns.

People who sought benefits with a Chicago disability lawyer may also deduct attorneys’ fees from their back payments. This is because attorneys’ fees are taken directly from back payments before the payments are disbursed to beneficiaries. Beneficiaries cannot deduct the total fee, but they may deduct a set fraction of it by filing itemized deductions.