Taxability of Social Security Disability Benefits

A common question that many individuals who collect Social Security Disability benefits have is whether the benefits are subject to taxes. Unfortunately, there is no clear-cut answer. Instead, the answer is that “it depends” and if you are unsure of your obligation, you should consult with a Social Security benefits attorney or accountant.

General Rules on Taxability of Social Security Disability Benefits

The general rule is that if you have no other source of income, your Social Security Disability benefits are not subject to federal taxes. The benefit is meant to assist people who are impaired and no longer able to work. By taxing that benefit, it would remove part of the assistance that the beneficiary depends upon.

However, if you do have a “substantial” source of income besides the Social Security Disability benefit, then you may have to pay taxes on your benefit. Individual tax payers who earn between $25,000 and $34,000 would have to pay taxes on roughly half the amount of their their tax rate. This does not mean that half the disability benefit will be taken away as taxes, just that the half amount would be subject to taxes at the taxpayer’s marginal tax rate.

Individuals who are married and file a joint tax return can earn more — up to a combined income of $32,000 — before being subject to federal taxes on their disability benefits.

Individuals who make more than $34,000 (or married couples filing jointly who earn more than $44,000) have to pay more in taxes on their disability benefits. In these cases, about 85 percent of the disability benefits would be subject to taxes at the marginal tax rate. So if your marginal tax rate is ten percent, you would have to pay taxes of ten percent on 85 percent of your disability benefit.

State Tax Rules

The above rules provide the federal income tax rules for disability benefits. You should also be aware that there may be some state rules. While a minority of states tax Social Security benefits, most states, including California, Hawaii and Oregon, provide a full exemption for any Social Security benefits.

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