Do You Have to Pay Taxes on Disability Payments?
Understand if your disability payments are taxable. This guide clarifies the factors influencing their tax status and how to report them accurately.
Whether disability payments are subject to federal income tax depends on several factors, including the source of the benefits and the recipient’s total income.
Social Security Disability Benefits and Taxes
Social Security Disability Insurance (SSDI) benefits can be subject to federal income tax, unlike Supplemental Security Income (SSI) benefits which are not taxable. The taxability of SSDI payments depends on your “provisional income,” also known as combined income. This calculation includes your adjusted gross income (AGI), any tax-exempt interest you received, and one-half of your Social Security benefits.
To determine if your SSDI benefits are taxable, you compare your provisional income to specific thresholds set by the IRS. For individuals filing as single, head of household, or qualifying widow(er), if your provisional income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxable. If your provisional income exceeds $34,000, up to 85% of your benefits could be subject to tax.
For married couples filing jointly, the income thresholds are different. If your combined provisional income is between $32,000 and $44,000, up to 50% of your Social Security benefits may be taxable. If your combined provisional income is more than $44,000, then up to 85% of your benefits may be subject to tax. Each January, the Social Security Administration sends Form SSA-1099, which details the total amount of Social Security benefits you received in the previous year.
Other Disability Payments and Their Tax Status
Beyond Social Security, various other disability payments have different tax implications depending on how the benefits are structured and who paid the premiums.
Disability benefits received from an employer-sponsored plan are taxable if your employer paid the premiums and those contributions were not included in your taxable income. However, if you paid the premiums for the disability insurance with after-tax dollars, the benefits you receive are not taxable. If both you and your employer contributed to the plan, only the portion of benefits attributable to your employer’s contributions is taxable.
For individuals who purchased private disability insurance policies and paid the premiums with their own after-tax dollars, the benefits received from these policies are not subject to federal income tax. This means the full benefit amount is received tax-free.
Workers’ compensation benefits received for an occupational sickness or injury are exempt from federal income tax. These payments are intended to replace lost wages or cover medical expenses due to a work-related incident, and the IRS considers them non-taxable income. This exclusion applies to both lump-sum settlements and periodic payments.
Benefits paid by the Department of Veterans Affairs (VA) for service-connected disabilities are also tax-free. This includes disability compensation, pension payments, and grants for homes or vehicles for disabled veterans. These benefits are excluded from gross income by federal law.
The taxability of state disability insurance (SDI) benefits can vary depending on the specific state program and federal tax rules. In some cases, if the employer contributed to the SDI plan or if the benefits are considered a substitute for unemployment compensation, they may be taxable. It is important to review the specific guidance for your state’s SDI program and federal tax regulations to determine the tax status of these payments.
How to Report Disability Income on Your Tax Return
When preparing your federal income tax return, properly reporting your disability income is essential. For Social Security benefits, the total amount received as shown on Form SSA-1099 is reported on line 6a of Form 1040. The calculated taxable portion of these benefits is then entered on line 6b of the same form.
To determine the taxable portion of your Social Security benefits, you use an IRS worksheet found in the instructions for Form 1040 or in IRS Publication 915. Many tax software programs also automatically calculate this amount based on your entered income figures. This calculation ensures that only the appropriate percentage of your benefits is included in your taxable income.
Taxable disability benefits received from an employer-sponsored plan are reported on Form W-2, Box 1, as wages. This is because these benefits are considered a substitute for earned income. If you received a Form W-2 for these payments, you would report them along with your other wage income.
Other types of taxable disability income not reported on a Form W-2 or Form SSA-1099 may need to be reported on Schedule 1 of Form 1040. Schedule 1 is used for reporting additional income sources not directly listed on the main Form 1040. The specific line on Schedule 1 would depend on the nature of the income.