Are Social Security Disability Benefits Taxed?

Nov. 2, 2021

Generally speaking, people work their entire adult lives paying into the Social Security and Medicare systems to receive both retirement and health benefits when they reach a qualifying age and leave the workforce.

Sometimes, however, something unexpected happens along the way, and a worker may need to tap into those accumulated funds because a medical condition leaves them unable to work. In this case, they may qualify for what is called Social Security Disability Insurance (SSDI).

Some individuals may qualify for Supplemental Security Income (SSI) if they are in need of income support but may not have contributed enough in qualifying work credits. These people are usually of limited income, and they must be age 65 or older, disabled, or blind to qualify, though benefits are also available for blind or disabled children.

The question is, “Are these benefits taxable even if you’re out on disability and receiving SSDI?” The answer varies and depends to a large extent on your marital status and sources of income, if any, outside of SSDI.

If you are on SSDI, applying for the program, or have been denied benefits in or around Raleigh, North Carolina, contact me at Lloyd King Law Firm PLLC. I have more than four decades of experience working on both sides of the fence, first as a disability judge for the Social Security Administration (SSA) and now as a private attorney protecting the rights of citizens to obtain the full benefits they deserve.

How Does SSDI Work? How Much Should I Be Paid?

Social Security Disability Insurance (SSDI) is a program run by the SSA to benefit workers who have paid into the system if they become disabled and unable to work for a living. To qualify for SSDI, you must have obtained a certain number of what the SSA calls “work credits.” You receive one work credit each quarter you work if you earn at least $1,470, which is the amount for 2021 (it changes yearly).

For SSDI, if you’re 31 years of age or older, you must have earned 20 work credits in the previous 10 years to apply. For ages 24 to 31, the standard is that you must have worked at least half the time between the ages of 21 and 31. If you’re younger than 24, you need six credits accumulated in the three years prior to becoming disabled.

To qualify as disabled, your medical condition must be expected to last at least a year or lead to death. This is where the SSA can challenge an application for SSDI. The agency can counter that your stated condition is not one it expects to last a year or more.

That aside, say you do qualify for benefits and you start receiving a monthly bank deposit. Your benefits will be based on your average lifetime earnings before becoming disabled. The average current SSDI payment is $1,277 monthly, and the cap is $3,148 at full retirement age.

If you receive additional disability benefits from a private pension or disability plan, that will not affect your SSDI, but if you receive government benefits such as workers’ compensation, that could be used to reduce your monthly amount. The same holds true if you are receiving state disability benefits. Together, all benefits you receive from SSDI and other public (not private) benefits cannot exceed 80 percent of your average monthly wage before becoming disabled.

SSDI Tax Consequences, If Any

Any federal taxes you may have to pay on your SSDI benefits depend on your married status and on other sources of income. Your SSDI benefits become taxable if one-half of that amount plus your other income reaches one of these levels:

  • $25,000 if you’re single, head of a household, or a qualifying widow(er)

  • $25,000 if you’re married filing separately and lived apart from your spouse for the entire year

  • $32,000 if you’re married filing jointly

  • $0 if you’re married filing separately and lived with your spouse at any time during the tax year

If your total income is below these thresholds, you do not have to pay taxes on your SSDI benefits. Keep in mind, however, that these thresholds are the base standard. The portion of your SSDI that will be taxable varies based on total income.

One-half of your SSDI will be taxable if you file as an individual and your total combined income (one-half of SSDI and all other sources) is between $25,000 and $34,000. Above $34,000, the taxable portion rises to 85 percent.

If you file jointly, you will be taxed on one-half of your SSDI plus all other income if your combined income falls between $32,000 and $44,000. Above $44,000, your SSDI is taxable at 85 percent.

This may sound confusing, so let’s look at an example: Your SSDI is $2,000 a month, and your total income falls into the one-half category. In that case, only $1,000 of your SSDI would be taxable. Say your income falls into the 85 percent category; then $1,700 would be taxable.

Keep in mind, however, these are just the amounts that will be taxable. The income taxes you pay would likely fall into the 15 to 25 percent category unless you fall into a high-income tax bracket.

North Carolina does not tax Social Security benefits of any sort, so you won’t have to pay any state taxes.

If you’re receiving Supplemental Security Income (SSI), that is never taxable.

How to Pay Your Taxes

If you do fall into a taxable bracket for your SSDI, you can ask the SSA to withhold taxes from your benefits. You have the option of choosing 7, 10, 12, or 22 percent to be withheld. You could also choose to make quarterly estimated tax payments. If you do neither, the IRS may sock you with a penalty for not paying your taxes in a timely manner.

Experienced Legal Counsel You Can Trust

Whatever your issue with SSDI or SSI, I can offer you sound answers based on decades of experience both hearing disability cases for the SSA and helping clients with their claims and appeals. I’m here to help people receive the benefits they deserve when they need them.

If you’re located in or near Raleigh, North Carolina, or Roanoke Rapids, Fayetteville, or Greensboro, feel free to reach out to me with your disability claims issues at Lloyd King Law Firm PLLC.