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Are my disability benefits taxable?

If you started receiving Social Security Disability benefits for the first time in 2015, then you may be wondering if you are going to be on the hook for income taxes when Tax Day rolls around this spring.

The good news is that, for most people, disability benefits are not taxable, especially if you are collecting Supplemental Security Income (SSI). That means you probably won’t have to write a check to Uncle Sam in April when filing your income tax return. But before you get too excited, keep reading...

What if I have a job and collect disability benefits?

Whether or not you will be taxed depends on how much income you earned during the tax year. According to H&R Block, you will not be taxed on your disability income if the amount you received in disability benefits plus all of your other income is less than:

  • $25,000, if you are filing as single, head of household, or married filing separately (but you and your spouse must have lived apart all year); or
  • $32,000, if you are married filing jointly.

If you don’t qualify under those income thresholds, then you may owe income taxes on up to 50 percent of your disability benefits.

H&R Block reports that you may even owe taxes on up to 85 percent of your disability income if half of your disability income plus all of your other earned income is more than:

  • $34,000, if you are filing as single, head of household, or married filing separately (but you and your spouse must have lived apart all year); or
  • $44,000, if you are married filing jointly.

What about state income taxes?

Michigan is one of the many states that exempt disability benefits from income taxes. That means if you live in Michigan, you will not owe income taxes on your disability income.

A note about lump-sum disability benefits

If you received a lump sum for retroactive disability benefits in 2015, you may have to pay income taxes on this amount, and it could result in you being in a higher tax bracket. However, if the benefits you received were retroactively making up for benefits in previous years, you may be able to apply those amounts to the previous tax years.

An experienced tax specialist can answer your questions about this issue and others related to the taxation of disability benefits. Just make sure you work with someone who is trustworthy and accredited.

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