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How to File Taxes When Receiving Social Security Disability Payments

Each and every year U.S. citizens have to file taxes with the Internal Revenue Service (IRS). When you work for an employer, tax season is rather simple and straightforward. Your employer deducts taxes from your weekly paychecks and, at the end of the year, provides you with a W-2 telling you how much money you made and how much of that money went to the government. That information is then used to file your taxes with the IRS. Tax season isn't so simple and straightforward for Social Security Disability beneficiaries, but it doesn't have to be a financial nightmare. If you have begun receiving payments from the Social Security Administration (SSA), the following information will help you get through the upcoming tax season and will help you understand how to file your IRS tax return.

Taxable Amount

The first thing you need to understand is that Social Security Disability payments aren't always taxable. If you do not make more than $25,000 a year and file as an individual or your household income is less than $32,000 per year and you file jointly, you will not have to pay taxes on your Social Security Disability benefits. If your income exceeds those limits, a portion of your disability payments may indeed be taxable.

The bad news is that, you may have to pay taxes on your disability benefits if your income exceeds a certain amount. The good news is that you will never have to pay tax on all of your disability benefits. In fact, no matter how much you make, you will never have to pay taxes on more than 85 percent of your Social Security Disability income. The limits are as follows:

  • If you earn more than $25,000 but less than $34,000 and file as an individual or more than $32,000 but less than $44,000 and file jointly, then fifty percent of your disability income will be taxable.
  • If you earn more than $34,000 if filing as an individual or more than $44,000 if filing jointly, then you will need to pay taxes on eighty-five percent of your disability income.

The exact dollar amount you are responsible for will depend on how much income you have received during the year and what tax deductions you may be entitled to.

The Back Payment Issue

If you have just begun receiving Social Security Disability payments and you received a back payment from the SSA, you need to be very careful when filing taxes and claiming your back payment amount as income on your tax return. Back payments are usually paid as a lump-sum amount by the SSA. This does not mean, however, that you should claim the full amount on the tax return for a single year. If you do claim your back pay as a single year's income, it will put you in a higher tax bracket and you may end up paying more taxes than you are actually liable for. Instead, you should file amended returns for the years that the back payment covered and only claim this year's payment on your current year's income tax return.

Knowing How Much to Claim

Each year the SSA will provide you with a form SSA-1099. This form will tell you how much money you received from the SSA in Social Security Disability benefits. You will use this form to fill out your income tax return.

If this is your first year filing taxes while receiving Social Security Disability payments, you may want to hire a tax professional to help you through the tax process. A tax professional can help you understand how your Social Security Disability benefits affect your tax liabilities and can help you through the back-payment issue.

Withholding Taxes

The SSA is not required to hold taxes back from your Social Security Disability payments. If you end up owing taxes at the end of the year, you can request that the SSA hold taxes back for you. If you would like the SSA to withhold taxes from your Social Security Disability payments, contact them to set up tax withholding arrangements.