SSDI and Federal Income Tax

“Nothing is certain except death and taxes.” Benjamin Franklin

If you receive Social Security Disability benefits, you may have to pay Federal taxes on your retroactive award and/or your ongoing monthly benefits in certain circumstances. This can happen if you receive income from other sources or if your spouse earns income. New York State does not tax SSDI benefits.

When you receive a retroactive SSDI payment, SSA is required to send you a 1099 form by February 1 of the following year. The 1099 form breaks down how much of the Social Security benefit received in the retroactive payment was a payment for a prior year (or years). The 1099 form also lists the amount of the attorney fee paid. You should carefully review your 1099 to make sure the numbers accurately correspond to your retroactive benefits and your ongoing monthly benefit as stated in your notice of award.

The IRS states that your SSDI benefits may be taxable when one-half of your benefits, plus all other income, exceeds an income threshold based upon your filing status. Generally, the amounts break down as follows:

For Individuals

Amount of Monthly Income

Amount of Annual Income Maximum Portion of SSDI to Be Taxed
0 - $2,083 0 - $25,000 0%
$2,084 - $2,833 $25,000 - $34,000

50%

$2,834 and up over $25,000 85%

For Married Couples

Amount of Monthly Income Amount of Combined Annual Income Maximum Portion of SSDI to Be Taxed
0 - $2,666 0 - $32,000 0%
$2,667 - $3,666 $32,000 - $44,000 50%
$3,667 and up over $44,000 85%

If your disability benefits are subject to taxes, they will be taxed at your marginal income tax rate. In other words, your tax rate would not be 50% or 85% of your benefits. The tax rate is the same used for your other income.

How are retroactive benefits treated?

Retroactive benefits of SSDI can increase your income in the year in which you receive them, which can cause you to pay a larger portion of your retroactive award in taxes than you should have to. To avoid losing part of your retroactive award this way, you can apply the SSDI benefits owed from a prior year to prior tax returns, lowering your income for the year you receive your retroactive award. For example, if you were entitled to disability benefits in 2020 and 2021 and received your retroactive award in 2022, you could amend your tax returns for 2020 and 2021 to claim some of the income in those years instead of the current year. 

Workers’ Compensation Reduction

In New York and other states, SSDI may be reduced by workers compensation and other public disability benefits. Unfortunately, the amounts deducted are included as benefits received for purposes of income tax. In effect, state WC is rendered taxable in an amount equal to the Social Security reduction, but only to the extent that SSDI is taxable for the year. 

Long Term Disability Insurance

Sometimes LTD benefits are paid and SSDI monies are later recouped by the LTD carrier. A beneficiary should be aware that simply because there are two 1099 statements received, the income cannot be taxed twice.

Withholding

You may opt to withhold taxes from your monthly benefits by filing an IRS Form W-4V with SSA. (This form can be found here.) Amounts withheld generally range from 7% to 25%.

Auxiliary Payments

Payments on a wage earner’s record to auxiliaries is deemed income to the auxiliaries, who may need to file a separate tax return. Each family member receiving benefits should get a separate 1099. This also applies to children. However, if the SSDI payments amounts are the child’s only income, it would be extremely unlikely that the child would need to pay any tax.

Determining the taxability of your benefits can be confusing and is based upon your particular circumstances. You should consult with a tax professional or accountant who understands Social Security Disability benefits to figure out how to reduce your tax liability.