A Quick Primer on the Taxation of Social Security Disability Insurance (SSDI) Benefits

Social Security Disability Insurance (SSDI) is a federal program that provides cash assistance to people with disabilities. Because SSDI is an insurance program and not a “means-tested” benefit for people with minimal resources, anyone who meets the program’s eligibility requirements can qualify for benefits, regardless of their income and assets.

SSDI payments, like old-age Social Security retirement benefits, can be taxed, depending on the SSDI beneficiary's other income. Because the rules governing the taxation of SSDI payments can be very confusing, we have put together a short primer to explain how the Internal Revenue Service (IRS) taxes these important benefits.

When Do SSDI Recipients Pay Taxes on Their Benefits?

To determine when an SSDI recipient should pay taxes on their benefits, the IRS adds one-half of a beneficiary’s yearly SSDI award to their adjusted gross income (including tax-exempt interest payments). This figure is compared to a “base amount.” If it exceeds that base, then some of the beneficiary’s SSDI award will be taxed.

For single people, or married people filing separately who have lived apart for the entire year, the base amount is $25,000. Married couples filing jointly have a base amount of $32,000, and a married person who is filing separately but lived with their spouse for even a limited time has a base amount of $0 (this is not a misprint).

Here are some examples of how this works in practice:

• Let’s say that Mary, a single woman, received $10,000 in SSDI benefits and $21,000 in taxable income from an annuity. Since one-half of Mary’s SSDI benefit, plus her $21,000 in other income, is greater than her base amount of $25,000, a portion of Mary’s SSDI benefit will be subject to federal income taxation.
   
• Now let’s look at Joe and Barbara, a married couple living together and filing a joint tax return. Joe received a $10,000 SSDI benefit, and Barbara earned $25,000 from work. When one-half of Joe’s SSDI benefit is combined with Barbara’s income, they are $2,000 below their base amount of $32,000 — meaning that none of Joe’s SSDI benefit will be taxed.

What Portion Is Taxable?

If SSDI benefits are subject to tax, what portion of them is taxable?

The short answer is either half of them or 85 percent of them, depending on income. If one-half of a single person’s benefit plus the rest of their income is less than $34,000 (this threshold is $44,000 for a married couple filing jointly), then only 50 percent of their SSDI benefit will be taxed. If a beneficiary’s income plus one-half of her benefit exceeds these thresholds, then 85 percent of the benefit is taxable.

In addition, individuals who are married and file separately, yet have lived with their spouse at any time during the tax year, will owe taxes on 85 percent of any SSDI benefits, regardless of income threshold. 

Maximum Taxable Amount

Generally, up to 50 percent of your benefits will be taxable. However, up to 85 percent of your benefits can be taxable if either of the following situations applies to you:

• The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
• You are married, filing separately, and lived with your spouse at any time during 2021.

Let’s say that Mary still has her $10,000 SSDI benefit, but now she earned $30,000 from an annuity. One-half of her SSDI benefit plus the annuity income equals $35,000, so 85 percent of Mary’s SSDI benefit will be taxed because she exceeded the $34,000 limit.

In our example of Barbara and Joe above, let’s now assume that Barbara earned $35,000 from work, and Joe still received a $10,000 SSDI benefit. Joe’s SSDI benefit is now subject to some taxation. But because one-half of Joe’s benefit plus Barbara’s income is less than $44,000, only 50 percent of Joe’s benefit will be taxed.

Now imagine that Joe and Barbara file their taxes separately, even though they are married and live together for some portion (or all) of the taxable year. Regardless of their income levels, Joe can expect to pay taxes on 85 percent of his SSDI benefits.

Although taxation of SSDI benefits seems complicated at first, it is actually fairly easy to see if benefits are taxable once you get the hang of these important concepts. However, there are many other tax tips for people with special needs that go far beyond SSDI benefit taxation, so make sure you discuss all of your options with your special needs planner and your accountant before filing your tax return.

For further reading, you can access the IRS publication 915 — the handbook for calculating taxes on SSDI benefits — on the IRS website.