If you are receiving disability benefits you may have to pay taxes on those payments.
If you are receiving Social Security or Long Term Disability benefits, you may be wondering how it will affect your taxes. Taxes can be complicated, and the information provided here is only intended to act as a guide. If you have a complex or unique situation, please seek the advice of an accountant or tax attorney.
SSI and Taxes
Supplemental Security Income benefits are not taxable. Even if you are receiving SSI for a child, the benefits do not count as income. For the 2019 tax year, individuals earning under $12,000 are not required to file a return at all. If SSI is your only source of income, you will likely not even have to file.
SSDI and Taxes
SSDI benefits may be taxable if your total income is high enough. Generally, if SSDI benefits are your only income, your income will not be high enough to tax. For the 2019 tax year, if your total income is $25,000 ($32,000 married filing jointly) then you may owe tax on your SSDI benefits. The average annual SSDI benefit is around $14,808. Most SSDI beneficiaries receive a large back pay check for their first payment. The back pay is for the time the applicant is eligible for benefits to the time they are actually approved. People are often concerned that this large payment will bump them into a higher tax bracket. Fortunately, the IRS allows SSDI beneficiaries to transfer some of their tax liability to the previous year.
If you have been denied disability you may still qualify for benefits. Contact an experienced Social Security disability attorney at 512-454-4000
LTD and Taxes
Are Long-Term Disability benefits taxable?
It depends on who paid the premiums for the policy and whether post- or pre- taxed incomed was used. If you paid for the entire cost of the policy (with post-tax dollars), then the benefits are generally not considered taxable. You pay the premium on your own, and the benefits are yours tax-free. However, benefits often do count as income if an employer paid for the plan you are receiving benefits through, unless the cost of the premium is reported as income to you.
Sometimes a cafeteria plan will allow you a choice to purchase coverage with pre or post tax dollars.
If you choose to pay your premiums with pre-tax dollars you will save money in the short-term on premiums, but if you need your benefits they will be taxed. If you are a young, healthy individual in a low-risk profession, it may make sense to choose this option. However, if you think there is a good chance you may need benefits, you will want to use after-tax dollars in order to prevent your benefits from being taxed. Keep in mind that disability insurance pay outs are typically significantly less than salary. If something unfortunate happens and you do need benefits, you will want to be able to take home the full benefit amount.
If your benefits are taxable, your insurer is required to provide information regarding the dollar amount of benefits paid and taxes automatically withheld.
|Who Paid the Premium?||Will you owe tax on the benefits?|
|You (Post-tax dollars)||No.|
|Employer||Yes, Benefits are considered income.|
|25% You (Post-Tax), 75% Employer||You will owe tax on 75% of benefits.|
|You (Pre-tax dollars)||Yes, you received a deduction for the premium payment.|
For LTD benefits, attorney’s fees may be deducted as an Adjustment to Gross Income (Line 36). The deduction is allowed under §62(e)(18)(ii) of the Internal Revenue Code–“(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits…”
For SSDI benefits, if the beneficiary does owe taxes, attorney’s fees can be deducted on Schedule A.
Taxes can be confusing. If you need additional guidance, a tax professional will be able to help you.
Disability benefits are an important source of income for those who are unable to work. If you not able to work due to injury or illness, you may be eligible for Social Security Disability or Long Term Disability benefits. If you have applied for benefits and been denied, contact the attorneys at Bemis, Roach and Reed for a free consultation. Call 512-454-4000 and get help NOW.
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