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Is Social Security Disability Benefit Taxable?

Social Security Disability BenefitThe SSDI (Social Security Disability Insurance) program for workers who experience a severe disability, which is awarded on the basis of a comprehensive medical records review, pays them monthly income and also includes incentives to return to work if they recover. Is this income taxable? Most people believe that since they have paid into the social security system, the benefits they earn from it are not taxable. However, there are situations when social security benefits are taxable for federal income tax purposes. Let us consider these.

Under SSDI, income levels for the majority of people are low enough and are not taxable. There is a difference though, in the case of married couples. One spouse may earn sufficient income and the couple’s income taken together may become taxable. To determine tax liability, it is important to take into account both the SSDI benefits received and any other income one may have.

  • Take one-half of the disability benefits and add all other income including wages, profits from business/farm or other sources, and investment income.
  • If it amounts to less than $25,000 for single filers or $32,000 for joint filers, it is not taxable. Amounts greater than these are taxable.
  • For single filers earning an income between $25,000 and $34, 000, around half their benefits may have to be included as taxable income. If the income comes to more than $34,000, the maximum amount of benefits one has to include in taxable income increases to 85%.
  • For joint filers the income levels corresponding are $32,000 to $44,000.

SSI (Supplemental Security Income) benefits are not taxable. The IRS does not insist that you include SSI payments in your taxable income. SSI is an income based program and recipients of this benefit are in such a position in which they would not have any tax liability.

The IRS recently released 2 new International Practice Units (IPU) regarding the payroll taxes payable by US citizens and resident aliens working abroad for a US employer, and on the requirement for the payment of those taxes by similar, self-employed individuals. FICA (Federal Insurance Contributions Act) taxes – a US federal payroll tax – cover social security taxes including old age, survivors and disability insurance; and Medicare taxes (hospital insurance tax). These taxes are typically withheld from the employee’s pay and paid to the IRS on their behalf.

  • The IPU confirms that FICA taxes must be paid by US citizens and resident aliens who work abroad for an US employer.
  • FICA taxes must also be paid on behalf of US citizens and resident aliens who work abroad for a foreign affiliate of an American employer, if the US employer agreed with the IRS to pay FICA taxes on all US citizens and resident aliens employed by its foreign associate.

Social Security Totalization Agreements made between the US and some foreign countries to prevent payment of social security taxes to two jurisdictions on the same wage income, may also govern whether FICA taxes must be paid to the US.

SECA (Self Employment Contributions Act) is relevant for US citizens and resident aliens who are self employed. Under this Act, self employed people of the above category must pay self employment tax if their net earnings from self-employment equal to or exceed $400 dollars. This tax has to be paid whether the self-employment activities are within the US or outside of it, and whether the person lives in or outside of the United States during the period of self-employment. All income from self-employment is considered to determine whether the $400 threshold is met, even if it is not taxable on account of the foreign earned income exclusion. “Residency” for both FICA and SECA taxes is typically the same even though the term “resident” is not defined.

The thought of losing some portion of one’s benefits to taxation can be frustrating to injured people and those fighting life-threatening illnesses and disability and struggling to survive with their disability benefits. However, tax rules have to be followed strictly to avoid landing in trouble with the IRS.

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