If you receive disability benefits every month, you may be wondering how it will affect your taxes. Here’s what you need to know about reporting these benefits on your income tax return and what could be taxable in your situation.
What is disability income?
There are three main types of disability income: Social Security, Military, and Retirement. Two programs that anyone with a disability can apply for are Social Security Disability (SSDI) and Supplemental Security Income (SSI). Both are government programs, but the way you qualify for them varies.
SSDI is provided through payroll taxes. If you have worked for a specific number of years and have been paying FICA taxes, you can qualify. You must also be younger than 65 years old and have earned “work credits.” The older you are, the more work credits you need. You must wait at least five months after applying for these benefits before you are approved. It is generally easier to get approved for SSDI than SSI.
SSI is needs-based. Rather than looking at your work history, they look at your financial needs. You must have less than $2,000 worth of assets if you are single and less than $3,000 if you are married. This program is funded through regular taxes, not Social Security. If you are eligible, you can also receive Medicaid from your state.
There is also disability retirement income and military disability. If you retire early because of a disability, your employer may pay you a disability pension. These programs are paid for by your employer.
If you are injured while serving in the military, you may receive disability compensation from the VA. If you suffer a post-service disability that is related to a disability sustained in service, you may also earn benefits.
Is my disability income taxable?
If you earn military disability from the government or the VA, you are not required to pay income tax on these amounts. However, any benefits paid to you by your employer are subject to tax and must be reported as wages on Form 1040.
SSI itself is not taxed, but if you earn additional income like self-employment, dividends, or interest, you will need to file a tax return.
SSDI benefits are also not subject to federal tax. However, a few states do tax SSDI:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Do I have to file taxes when receiving disability benefits?
It depends on how much income you receive and–if you’re married–whether or not your spouse receives an income. If you are married and your spouse still earns income, you must file either married filing jointly or married filing separately.
If you’re single and your only income is from disability, you may not be required to file a return. But if you choose to file anyway, you could take advantage of other credits and deductions to receive a refund. As a single filer, you will need to file and pay taxes if your disability income is more than $25,000.
What disability benefits qualify as earned income?
If you are trying to apply for the Earned Income Tax Credit (EITC), you may be wondering if your disability income qualifies. If you earn disability retirement benefits, you can count it as earned income until you reach the age when you could receive a pension or annuity if you were not disabled.
SSDI and SSI are not considered earned income by the IRS. Military disability does not qualify as earned income, either.
Are there any tax credits for people with disabilities?
Yes. There is a credit called Credit for the Elderly or the Disabled. You can get back an amount from $3,750 to $7,500. You must be either 65 or older or retired on permanent and total disability. You must also receive taxable disability income during the tax year. Finally, you are required to meet a specific adjusted gross income or have a total amount, including Social Security, pensions, annuities, and disability income resulting in a particular amount.
For more information, read IRS Publication 524.
This article is up to date for tax year 2021 (returns filed in 2022).