Does Disability Income Get Taxed? What to Know
Is your disability income taxable? This guide clarifies the tax implications based on the source of your benefits.
Disability income, which provides financial support when an injury or illness prevents working, comes from various sources. The taxability of this income depends on the specific source and the individual’s financial situation. This article clarifies the tax implications for common types of disability benefits.
Social Security Disability Benefits
Social Security Disability Insurance (SSDI) benefits may be subject to federal income tax, contingent on the recipient’s “provisional income.” Provisional income is calculated by adding your adjusted gross income (AGI), any nontaxable interest income, and one-half of your Social Security benefits.
For a single filer, head of household, or qualifying surviving spouse, if provisional income is between $25,000 and $34,000, up to 50% of SSDI benefits may be taxable. If provisional income exceeds $34,000, up to 85% of the benefits can become taxable. For married couples filing jointly, these thresholds are $32,000 for up to 50% taxation and $44,000 for up to 85% taxation. Recipients typically receive Form SSA-1099, which reports the net amount of Social Security benefits received, aiding in tax calculations.
Supplemental Security Income (SSI) payments are not considered taxable income. SSI is a needs-based program, distinct from SSDI. Individuals do not report SSI payments on their federal tax returns.
Workers’ Compensation Benefits
Payments received as workers’ compensation for an occupational sickness or injury are generally exempt from federal income tax. This exemption applies whether the benefits are received as weekly wage loss payments or as a lump-sum settlement.
An exception to this rule occurs if a recipient also receives Social Security Disability benefits. If the workers’ compensation payments reduce the amount of Social Security Disability benefits received, the portion of the Social Security benefits that is offset by the workers’ compensation may become taxable. This situation can make a portion of the Social Security Disability income taxable, even though workers’ compensation benefits themselves remain non-taxable.
Private Disability Insurance Payments
The taxability of payments from private disability insurance policies depends on who paid the premiums and whether those premiums were paid with pre-tax or after-tax dollars. If an individual paid all the premiums for their private disability insurance policy using after-tax dollars, the benefits received are generally not subject to income tax. This is because the money used to pay the premiums has already been taxed.
If an employer paid all the premiums, and the employer’s contribution was not included in the employee’s taxable income, then the disability benefits received are generally taxable to the employee. The IRS views these benefits as a replacement for taxable wages. If both the employer and the employee contributed to the premiums, the benefits are taxable proportionally to the employer’s contribution. For instance, if the employer paid 60% of the premiums, then 60% of the received benefits would typically be taxable.
Veterans Affairs Disability Payments
Disability benefits provided by the Department of Veterans Affairs (VA) are generally not considered taxable income. This includes various forms of assistance, such as disability compensation and pension payments provided to veterans or their families. Grants for specialized purposes, like those for homes designed for wheelchair living or for motor vehicles for disabled veterans, are also typically tax-exempt.
These VA benefits do not need to be reported as income on a federal tax return. This tax-free status applies regardless of whether the veteran also has other sources of income.