Paying income tax on Social Security benefits

You will have to pay federal taxes on your Social Security benefits if you file a federal tax return as an individual if your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income of more than $32,000.

Use the Internal Revenue Service (IRS) Notice 703 shown on the back of the Social Security Benefit Statement Form 1099 to determine if any of your benefits may be taxable.

Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

There are really two major types of SSDI payments that are subject to tax:

• SSDI monthly payment, and
• Lump-sum (retroactive) payments of SSDI benefits.

With both types of SSDI payments, how much that is taxable depends on the total amount of your benefits and other income.

SSDI Monthly Payments

When figuring out what’s taxable, SSDI payments are treated like regular Social Security payments and reported to you on Form SSA-1099.

So in general, up to 50 percent of your benefits may be taxable each year, plus all your other income (including tax-exempt interest). The worksheet below can be helpful.

                                      Worksheet to Check if SSDI Benefits are Taxable

A.
Enter the amount from box 5 of Form SSA-1099 issued by the SSA to report amounts paid to a person and taxes withheld for the year. If you received more than one form for the year, combine all the amounts from box 5 and enter the total…
Note: If the amount here is zero or less, stop here; none of your benefits are taxable this year.
B.
 Enter one-half of the amount on line A…
C.
Enter your taxable pensions, wages, interest, dividends, and other taxable income…
D.
Enter any tax-exempt interest income (such as interest on municipal bonds) and any exclusions from income (listed earlier)…
E.
 Add lines B, C and D…
  • When you get through the worksheet above, compare the amount on line E to your base amount for your filing status.
  • If the amount on line E equals or is less than the base amount for your filing status, none of your benefits are taxable this year.
  • If the amount on line E is more than your base amount, some of your benefits may be taxable.

For the 2011 tax year, the base amounts are:

  • $25,000 if you are single, head of household or qualifying widow(er)
  • $25,000 if you are married, filing separately and lived apart from your spouse for all of 2011
  • $32,000 if you are married, filing jointly, or
  • $0 if you are married, filing separately and lived with your spouse at any time during 2011

When Up to 85 Percent of SSDI Benefits Can be Taxed

While it is not very common, up to 55 percent of your monthly benefits can be taxable in the following cases:

  • If the total of one-half of your benefits and all your other income for the tax year is over $34,000 if filing single or $44,000 if you are married, filing jointly; or
  • If you are married, filing separately and lived with your spouse at any time during the tax year.

Lump-sum (Retroactive) Payment of SSDI Benefits

This is one area where SSDI recipients sometimes have difficulty.

A lump sum retroactive SSDI award represents a payment that includes benefits calculated for earlier years.

For tax purposes, you account for the retroactive award in the tax year you get the award. However, you do not treat all of the retroactive award as income in the tax year received. If you do, you are making a huge mistake that will result in you paying unnecessary taxes.

Here’s how to make sure you don’t make that mistake:

  • If you received a lump-sum SSDI payment in 2010 that includes benefits for one or more earlier years, it will be included in box 3 of Form SSA-1099 – the Social Security benefit statement you receive from the Social Security Administration.
  • The form also will break down the taxable part of the benefits to show the year (or years) to which they apply.

Example: You receive a lump sum payment in 2011. You will want to report the entire lump sum amount you receive in 2010 (including the portion for 2010 and portions for earlier years) on your 2011 tax return. Since the earlier year’s taxable benefits are included in your 2011 income, no adjustment is made to returns filed in previous years – so don’t file amended returns.

To figure out the taxable portion of a retroactive SSDI payment for previous years, you can use the worksheets provided in IRS Publication 915. Please be careful when making calculations.

Deductions and Credits

When figuring out the taxability of a lump-sum SSDI payment, please remember these two deductions you can take:

  • You can deduct the expenses that you pay to collect your SSDI retroactive award. This means that attorney’s fees for collecting the taxable part of your SSDI benefits are tax deductible.
  • If you received disability payments through an employer’s or insurance company’s long-term disability policy and you had to repay the employer or insurance company for any retroactive SSDI disability payments, you can take an itemized deduction for all or part of the repayments.