Social Security disability benefits may be taxable if you have other income that puts you over a certain threshold. However, the majority of people who receive Social Security benefits do not have to pay taxes on their benefits because most people who meet the strict criteria to qualify for the program have little or no additional income.
- Many Americans rely on Social Security Disability Income (SSDI) benefits for financial support.
- If your total income, including SSDI benefits, is higher than IRS thresholds, the amount that is over the limit is subject to federal income tax.
- Most states do not tax SSDI benefits, but 13 states do (to varying degrees).
How Social Security Disability Works
President Franklin Roosevelt included the Social Security program as part of his New Deal government reforms of the 1930s. The purpose of the New Deal was to lift the country out of the Great Depression and restore its economy. Social Security was designed to provide a financial safety net for older Americans and those with qualifying disabilities.
Most people who receive Social Security disability benefits fall into the former category. They have reached at least the minimum retirement age of 62 and have filed to receive monthly benefits based on the money they paid into the system during their working years.
People who receive Social Security benefits due to a disability do not have to be of a particular age to receive benefits (although they do need to have paid into the Social Security system while they were working). Instead, their disability must meet the strict criteria laid out by the Social Security Administration (SSA).
First, the SSA says, "Your condition must significantly limit your ability to do basic work such as lifting, standing, walking, sitting, and remembering—for at least 12 months." The condition must prevent you from doing the kind of work you did previously, and based on your age, education, experience, and transferable skills, you are unable to perform other work.
Additionally, you must not currently be working or working so little that your monthly income is under $1,310 in 2021 ($1,350 for the 2022 tax year). The specific type of disability must be included on the SSA's approved list or otherwise judged to be of equal severity to a condition on the list.
Someone who receives SSD benefits can invest in securities such as stocks, bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs) without jeopardizing their benefits. Dividend income from stocks, as well as other sources of passive income, is OK as far as the SSA is concerned because it’s unearned income.
When Disability Benefits Are Taxed
Whether Social Security disability benefits are taxed depends on your total income. You will avoid taxes if your total income—which is determined by adding one-half of your disability benefits to all other sources of income, including tax-exempt interest—is below the threshold set by the Internal Revenue Service (IRS). If you are single, the threshold amount is currently $25,000. If you are married and file jointly, it is $32,000.
State Taxes on Disability Benefits
Most states do not tax Social Security benefits, including those for disability. As of 2020, however, a total of 13 states tax benefits to some degree. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Most of these states set similar income criteria to the ones used by the IRS to determine how much, if any, of your disability benefits are taxable.