Do I Have to Report Disability Income on My Taxes?

Disability income taxability can seem complicated, as not all benefits are treated the same way by the Internal Revenue Service (IRS). Tax implications depend on the income source and circumstances. Understanding these distinctions is important for accurate tax preparation.

Understanding Taxability of Different Disability Income Types

Social Security Disability Benefits (SSDI) may be partially taxable, depending on your “provisional income.” It includes your adjusted gross income, any tax-exempt interest, and half of your Social Security benefits. If your provisional income is between $25,000 and $34,000 for an individual, up to 50% of your benefits may be taxable, or between $32,000 and $44,000 for those filing jointly. For provisional income exceeding $34,000 as an individual or $44,000 as a joint filer, up to 85% of your Social Security benefits can be subject to federal income tax.

Supplemental Security Income (SSI), a needs-based program, is not taxable income by the IRS. This benefit provides financial assistance to aged, blind, and disabled individuals who have limited income and resources. Recipients do not report SSI payments on their federal income tax returns.

Workers’ Compensation benefits received for an occupational sickness or injury are not taxable. This exclusion applies if the payments are made under a workers’ compensation act or similar statute. These payments are compensation for personal physical injuries or sickness, which are not included in gross income.

Benefits paid by the Department of Veterans Affairs (VA) for service-connected disabilities are also not taxable. This includes disability compensation, pension payments, and grants for homes or vehicles for disabled veterans.

The taxability of benefits from employer-sponsored disability plans depends on who paid the premiums for the policy. If your employer paid the premiums and did not include them in your gross income, any benefits you receive are taxable. Conversely, if you paid the premiums with after-tax dollars, the disability benefits you receive are not taxable.

Private disability insurance benefits follow a similar rule regarding premium payments. If you paid the premiums for your private disability insurance policy with after-tax dollars, the benefits you receive are not taxable. However, if the premiums were paid with pre-tax dollars, or if an employer paid the premiums on your behalf and the payments were not included in your taxable income, then the disability benefits received would be subject to income tax.

Reporting Taxable Disability Income on Your Return

When you receive Social Security disability benefits, you will receive Form SSA-1099, Social Security Benefit Statement, by the end of January each year. This form shows the total amount of benefits you received during the year and any amounts you may have repaid. You will use the information from this form to determine the taxable portion of your benefits.

Taxable Social Security benefits are reported on Line 6a and Line 6b of Form 1040. Line 6a will show the total benefits received, while Line 6b will show the taxable amount. The IRS provides worksheets in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to help calculate the taxable portion.

For taxable disability income from employer-sponsored plans, you may receive a Form W-2. This form reports the income as wages, salaries, or other compensation, which is then included on Line 1 of Form 1040. The employer withholds income tax from these payments, similar to regular wages.

Some private or employer-sponsored disability payments might be reported on Form 1099-R. This form indicates the total distribution and the taxable amount. The specific box on Form 1099-R where the amount is reported can vary, but taxable disability income from these sources is reported on Schedule 1 (Additional Income and Adjustments to Income) of Form 1040, under “Other Income.”

Accurate records of disability payments and tax forms are important. This ensures that all taxable income is correctly reported on the appropriate lines of your federal income tax return. Proper documentation helps in accurately calculating your tax liability and avoiding potential discrepancies with the IRS.

Other Tax Considerations for Individuals with Disabilities

Individuals with disabilities may qualify for the Credit for the Elderly or the Disabled. This credit is available to individuals who are age 65 or older, or who are under age 65, retired on permanent and total disability, and receive taxable disability income. To be eligible, your adjusted gross income and other nontaxable income must fall below specific limits.

Self-employed individuals with disabilities may be able to deduct impairment-related work expenses. These are ordinary and necessary business expenses for attendant care services at your workplace and other expenses necessary for you to work due to your physical or mental disability.

Unreimbursed medical expenses, including those related to a disability, may be deductible if they exceed a certain percentage of your Adjusted Gross Income (AGI). For the 2024 tax year, the threshold is 7.5% of AGI. These expenses can include payments for diagnosis, cure, mitigation, treatment, or prevention of disease, as well as payments for treatments affecting any structure or function of the body.

Achieving a Better Life Experience (ABLE) accounts provide a tax-advantaged savings option for individuals with disabilities. These accounts allow eligible individuals to save money without impacting their eligibility for means-tested government benefits, such as Supplemental Security Income (SSI). Contributions to an ABLE account for 2024 are capped at $18,000 per year, but higher contributions are possible for employed beneficiaries.