Understanding when benefits are taxable

Tax liability is an issue that many Social Security Disability recipients don’t think about until tax season begins. Although some beneficiaries may believe otherwise, SSD benefits are not exempt from federal taxation. However, as any Chicago disability attorney understands, many beneficiaries do not ultimately pay taxes on their benefits. This is because taxation of SSD benefits is based on income brackets, and many SSD beneficiaries have limited income.

Calculating liability

People who receive little income outside of their SSD benefits are unlikely to owe taxes on these benefits. Tax liability for SSD benefits is based on “combined income,” which includes half of SSD payments and all other forms of income. The following combined income levels and filing statuses trigger taxation:

  • For people with combined income above $25,000 who file as individuals, up to 50 percent of SSD benefits are taxable. People who file as individuals and receive more than $34,000 may have to pay taxes on 85 percent of their SSD benefits.
  • Married people who file jointly and have combined income exceeding $32,000 may owe taxes on 50 percent of their benefits. For married couples with joint income greater than $44,000, up to 85 percent of SSD benefits may be taxable.
  • Married people who file separately usually owe money on a portion of their SSD benefits. This portion cannot exceed 85 percent.

Like monthly SSD benefits, lump sum back payments are taxable, as a Chicago disability attorney could explain. Fortunately, beneficiaries can allocate portions of back payments to prior tax years. This allows beneficiaries to avoid paying taxes that exceed the amount they would owe if the payments had been disbursed separately.

Planning ahead

Every January, the Social Security Administration sends out a Social Security Benefit statement. This statement shows the total value of SSD payments made the year before. Beneficiaries can use this figure to calculate their combined income and determine their total tax liability for SSD benefits.

Beneficiaries who owe taxes can choose between making one annual payment or quarterly estimated tax payments. Depending on overall tax liability, some beneficiaries may face penalties for waiting to pay their taxes in April. Paying quarterly estimated taxes based on Social Security benefits and other income can help beneficiaries avoid these additional expenses.

Beneficiaries who expect to owe taxes in the future can request that the SSA deduct taxes from pending benefits. The deduction must be a proportion of the total payment amount, rather than a flat figure. Beneficiaries can choose deductions ranging from 7 to 25 percent. As a Chicago disability attorney might note, this measure can help beneficiaries avoid budgeting issues or unexpected tax burdens come tax season.