Tax season is not a fun time for anyone. Social Security Disability recipients are no exception to this rule. In fact, understanding your tax liabilities when receiving disability benefits can be rather confusing - especially for people who are new to filing taxes as a disability benefits beneficiary. Those who are used to simple and straightforward tax preparation with easy-to-read W-2's may be overwhelmed by the complications faced during tax season now that they have a SSA-1099 to complete. Fortunately, disability benefits do not have to turn tax preparation into a nightmare. The following five tips will help you through the upcoming tax season.
#1: Social Security Disability Payments Aren't Always Taxable
The first thing you need to understand is that disability payments are not always taxable. If you file a federal return as an individual and you do not make more than $25,000 a year, you will not have to pay taxes on your disability benefits. If you file your taxes jointly, you will not have to pay taxes on your benefits if your household income is less than $32,000 per year.
#2: Understanding What Percentage is Taxable
If your income is more than $25,000 as an individual or $32,000 on a joint return, you will need to pay taxes on your disability benefits. That does not mean, however, that the entirety of your benefits will be taxed. If your income is between $25,000 and $34,000 (if filing individually) or $32,000 and $44,000 (if filing jointly), fifty percent of your benefits will be taxable. If your income is above $34,000 (if filing individually) or $44,000 (if filing jointly), 85 percent of your benefits will be taxable.
#3: Paying Taxes on Back Payments
If this is your first year receiving disability payments, chances are that you received a lump sum payment for back payments that were owed to you by the SSA. If you claim the full amount of this lump sum payment on your current year's income taxes, you will likely end up paying taxes that you do not owe.
Let's say, for example, that you receive $1,000 per month in benefits. Your payments began in June and you also received 16 months of back payments in addition to the monthly payments you received this year. Thus, you received a total of twenty-three months of payments this year (the 16 months of back payments and the 7 months of benefits paid to you during the months of June through December), or $23,000.
When filing your income taxes, you would not want to claim all 23 months of payments on this year's income tax return. Instead, you would need to file an amended return for the previous year. You would take $11,000 of the benefits you received this year and add it to the prior year's return. Then, you would take the remaining $12,000 for this year and include it with your current year's tax return.
If you added all twenty-three months of benefits to this year's income tax return, you could end up paying taxes on your benefits due to the amount of money you received in back payments. This could be a very costly mistake since part of that income was technically for the previous tax year and not the current year.
#4: Hiring a Professional
If this is your first year receiving disability benefits and you have never filed a tax return using a SSA-1099, you may want to consider hiring a professional to do your taxes for you. The cost for professional tax preparation is minimal and a professional accountant can help you understand how your Social Security Disability affects your income taxes. A tax professional can also ensure that you do not overpay in taxes due to a lump sum back payment.
#5: Having Taxes Withheld
If you do end up owing taxes on your disability payments, you may want to contact the SSA to have taxes withheld from your future payments. The SSA will not withhold taxes automatically. In order to have taxes withheld from your disability payments, you will need to contact the SSA.
When having taxes withheld from your disability payments, it is important to remember that only federal taxes can be withheld from your benefits. You will still be responsible for paying any applicable local and state taxes and filing your income tax returns.
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