Is SSDI Income Tax Exempt?
As is often stated, nothing is certain except death and taxes. Depending on an individual’s other sources of income, their Social Security disability benefits may require them to pay taxes as income.
SSDI recipients rarely owe taxes due to limited or no other income sources; however, approximately one-third do pay some. In this article we’ll discuss when SSDI is taxable and provide resources to minimize your tax bill.
No
Typically speaking, only about one-third of SSDI beneficiaries must pay taxes on their benefits; the amount will depend upon your household income level.
In 2023, for example, you and your spouse can earn up to $32,000 annually (comprising half your SSDI benefits and other sources) before including some or all of the payments from SSDI in your taxes. If your income surpasses this threshold, up to 85% of your SSDI benefits may become taxable.
If you are receiving a large lump-sum back payment, it may be beneficial to consult a qualified accountant in order to receive personalized tax guidance regarding its tax implications. An expert professional can ensure your SSA back payments are properly reported and reduce potential tax liabilities; additionally they may help withholding of part of SSDI payments by filing IRS Form W-4V.
50% – 85%
SSDI benefits may be taxed, yet most disability recipients don’t owe taxes due to other forms of income, including wages from work, investment gains/dividends/bank interest payments and retirement income from 401(k) plans and traditional IRAs.
If a beneficiary’s total income falls under a threshold, which varies by filing status, no taxes will be assessed on their SSDI benefits. Once their total income exceeds this threshold, 50 to 85% of their SSDI may be subject to taxes.
As large lump-sum retroactive benefits can increase a beneficiary’s annual income and make taxes more expensive than necessary, disability beneficiaries may opt to have their retroactive SSDI payments applied towards prior tax returns instead of increasing their own yearly income by receiving them all at once. It’s best to consult a tax expert when making this choice and be mindful of potential consequences before proceeding with it.
Taxable at the State Level
Some states levy taxes on SSDI income using various approaches; some only tax payments that exceed certain thresholds, while others don’t levy an income tax at all.
SSDI benefits are typically only subject to federal taxes when an individual’s adjusted gross income (AGI) surpasses $25,000 when filing as an individual, or $34,000 when filing jointly, respectively. When this occurs, up to 85% of SSDI payments could potentially be included on a tax return.
Individuals should seek advice from a tax professional when determining how much of their SSDI benefits will be taxable, and may also discover ways to lower tax liabilities.
An accountant can also help an individual file their taxes by having Social Security Administration withhold part of their monthly paycheck to pay the IRS directly – this process involves filling out an IRS Form W-4V.
Taxable at the Federal Level
As the saying goes, nothing in life is certain except death and taxes. Although no one wants to pay more in taxes than necessary, beneficiaries need to understand their Social Security benefits and how they are classified.
Federally, SSDI income can become taxable when combined with other sources to exceed an IRS threshold that differs based on filing status. This could happen if dividends or tax-exempt interest income comes in or if additional money comes in through employment.
Since determining your taxable amount can be complex, it’s advisable to speak to a tax professional in order to identify how much of your SSDI may be subject to tax. Doing so could save you from facing an excessively large tax bill and may help decrease any liabilities from past returns.
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