You may or may not have to pay taxes on your disability benefits. Whether disability income is taxable depends on the type of benefit and your other income.
Reminder: Working While Receiving Disability Benefits
Before getting into taxes, it’s important to remember that your disability benefits may have conditions about whether and how much you’re allowed to work.
For example, Social Security Disability Insurance benefits only apply when you can’t engage in substantially gainful employment. To determine whether you’re engaged in substantially gainful employment, the Social Security Administration looks at things like your monthly earnings and how many hours you work each month.
On the other hand, some VA disability benefits don’t have any work restrictions while others do. The same thing holds true for other disability benefits you may receive through an employer or insurance.
Again, this is something to be aware of, but it’s not a tax issue. Before you decide to work, review the terms of your benefits and consider talking to a disability attorney.
Do you have to pay taxes on disability benefits?
Disability benefits may be taxable income or not depending on your situation. You also need to look at both federal income tax requirements and state income tax requirements.
Here are the federal tax rules for different types of benefits. State rules vary. They may do the same thing, charge less taxes, or tax things the IRS doesn’t.
Is Social Security Disability Insurance taxable income?
SSDI benefits work similarly to Social Security retirement benefits. You only pay taxes on Social Security disability benefits if your total income is over a certain amount.
To determine your income, you usually add half of your Social Security Disability income to your other income. Your other income can include both taxable income and tax-exempt income such as tax-free interest income.
If that number is over the income limits, you usually have to pay income tax on your Social Security benefits. If that number is under the income limits, you usually won’t have to pay tax.
For single filers, the limits are:
- Up to $25,000: Pay no tax on your benefits
- Between $25,000 to $34,000: Pay tax on 50% of your benefits
- Over $34,000: Pay tax on 85% of your benefits
For joint filers, the limits are:
- Up to $32,000: Pay no tax on your benefits
- Between $32,000 to $44,000: Pay tax on 50% of your benefits
- Over $44,000: Pay tax on 85% of your benefits
If you’re married filing separately, special rules apply.
- If you did not live with your spouse during the year, you typically follow the rules for single filers.
- If you did live with your spouse during the year, your benefits are generally taxable if you have more than $0 in income.
Is Supplemental Security Income taxable income?
Supplemental Security Income (SSI) benefits are generally never taxable. However, the SSI program does have income limits.
Are VA disability benefits taxable?
VA disability benefits are generally exempt from taxes by law. This is a special law specifically for VA benefits.
Note that other military retirement pay you receive will often be taxable.
Are employer disability benefits taxable income?
A disability pension or other benefits you receive from an employer will generally be taxable income. The idea is that the benefits replace the taxable wages you would have received if you were able to continue working. The benefits are also part of your compensation for working for that employer.
Even disability pensions for public service workers like police officers and firefighters are usually taxable. However, it’s common for the state that gave you those benefits to exempt you from its own state taxes.
Is private insurance company disability income taxable?
If you receive disability income from an insurance company, whether you have to pay taxes usually depends on who paid the premiums.
- If your employer paid the premiums, the benefits are normally taxable.
- If you paid the premiums with after-tax dollars, the benefits are normally not taxable.
- If you paid the premiums with pre-tax dollars (e.g., some payroll deductions), the benefits are normally taxable because you received a tax break when paying for the policy.
Is workers’ compensation taxable?
Workers’ compensation usually isn’t taxable. As a government-back program, it follows special rules.
One exception where your workers’ comp may become taxable is if you also receive SSI or SSDI benefits. Then it can depend on your income just like the usual rules for Social Security Disability Income.
Is short-term disability insurance taxable?
There’s usually no distinction between short-term and long-term disability for tax purposes. Whether you owe taxes on short-term disability depends on the type of benefits you received.
How do you pay taxes on disability income?
When you have disability income that is either definitely taxable or might be taxable depending on your income, you should get either a W-2 or 1099 at the end of the year. If you don’t receive your tax forms by January 31st, contact the agency or company that paid you.
Once you have your tax forms, filing your taxes is easy. First, review the tax forms to make sure they’re correct. Errors are rare but do happen.
You can file your tax return in a few minutes if you use tax filing software. It will ask you what income you had during the year. You’ll then copy the info from your tax forms.
Once you’ve entered everything, the software will do all of the math like checking whether your income was over the limits to pay taxes.