Are Disability Benefits Taxable?
If I am disabled are my benefits taxable and are there any additional tax credits I qualify for?
Author: Attorney Lonnie Roach
The holidays are over and it’s not too early to start thinking about preparing your tax return. If you are a person living with a disability, you are eligible for a variety of tax breaks and credits you may or may not be aware of. Some disability payments are free of income tax while other deductions and tax credits are available only to disabled people and their caregivers.
The Internal Revenue Service considers a person disabled if they have an impairment that prevents them from consistent employment.
This does not include ordinary tasks like personal care or household chores. The IRS acknowledges that an individual who may be able to take care of their personal needs and surroundings may still be unable to work.
What payments and benefits are considered taxable income?
Income received from disability income insurance may or may not be taxable; it depends on the type of benefits received, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums. Payments received under a long-term or short-term disability insurance plan paid for by an employer is taxable income. If a person has purchased disability insurance individually, any payments received are not taxable because the premiums were paid with after tax dollars. If an employer and employee share the cost of premiums, the employee would have to report part of the disability income received.
If you have been denied disability don’t give up! Contact a Disability lawyer at 512-454-4000 for a free consultation and get the benefits you deserve.
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 2020 tax year, individuals earning under $12,400 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.
For most people, Social Security disability benefits are not taxable, but SSDI may be taxed by the federal government if you or your spouse have another source of income and your adjusted gross income is above a certain limit.
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 2020 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 $15,324. 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.
Reimbursements for medical care is not taxed as income, but may reduce the amount of any medical costs deducted on an itemized tax return.
Also, the following disability payments are not taxable:
- Benefit payments from a public welfare fund
- Disability payments connected to military service payments
- Workers’ compensation for an occupational sickness or injury
- Disability benefits under a “no fault” car insurance policy for loss of income as a result of injuries
- Compensation for permanent loss or use of a part or function of your body or permanent disfigurement.
See IRS Publication 525.
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.
Keeping this information in mind, a disabled person may be able to take advantage of some major tax benefits.
Tax Credit for the Elderly and Disabled.
If you are 65 or older during the tax year, or permanently and totally disabled when you retired, you may be eligible for a tax credit. In order for a disabled person to qualify, they must satisfy all of the following requirements.
- They must be totally and permanently disabled when they retired;
- They must receive taxable income during the year; and
- They must be younger than their employer’s mandatory retirement age before be the beginning of the tax year. Mandatory retirement is the age an employer requires employees to retire; it is different for different companies.
This tax credit is only for those individuals whose adjusted gross income does not exceed $17,500 and whose non-taxable Social Security and pension benefits do not exceed $5,000.
For couples filing jointly, their adjusted gross income cannot exceed $20,000, plus $5,000 in non-taxable Social Security and pension benefits. For more information, see IRS Publication 524, Credit for the Elderly or the Disabled.
Larger Standard Deduction.
If you are legally blind you may qualify for an increased standard deduction. You must have a certified letter from an eye doctor stating that you have non-correctable 20/200 vision in your best eye or your field of vision is restricted to 20 degrees or less. If you are single and head of a household, you may increase your standard deduction by $1,650. If you are filing jointly and you or your spouse are blind, you may increase the deduction by $1,300. If both you and your spouse are blind, the standard deduction can be increased by $2,600. See IRS Publication 501.
Any costs in making improvements to your home to accommodate your disability may be deducted, but the modifications must be made specifically for that purpose. These modifications include ramps, railings, chair lifts, grab bars, electrical fixtures and hardware. If the improvements increase the value of the home, only the portion of the expense that exceeds the increase in value can be deducted. See IRS Publication 502.
Impairment Related Work Expenses.
Any expenses for disability related services at your work place or outside work that are needed to perform your job may be deducted. For example, a blind person might employ a reader to help them at work. These expenses are not subject to the 7.5% limit on adjusted gross income that is applied to medical expenses in a person’s itemized personal tax return.
Child and Dependent Care Credit.
If you pay for day care or other care for a dependent, while you work or look for work, you may be eligible for the Child and Dependent Care Credit. Usually, this applies to children under the age of 13, but it also can be used to pay for adult day care for a spouse or other adult dependent who is physically or mentally disabled. Note you must itemize your deductions to claim this credit. The amount of the credit depends on the taxpayer’s income.
People with disabilities who itemize can deduct medical expenses and out of pocket expenses not covered by insurance as well as health insurance premiums.
ABLE Accounts allow disabled people and their friends and family to save money to pay for the disabled person’s expenses. The Tax Cuts and Jobs Act increased the total amount that may be contributed to an ABLE account through 2025. Once the $15,000 annual limit is reached, a disabled individual may make an additional contribution equal to the lesser of:
- the federal poverty line for a one-person household, or
- the individual’s compensation for the year.
If you have difficulty completing your tax return, you may want to consult with a certified accountant or a qualified tax attorney.
Also, the Internal Revenue Service provides special assistance to people with disabilities through locals IRS office and the Volunteer Income Tax Assistance Program.
Disability benefits are an important source of income for those who are unable to work. If you not able to work due to accident 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.
Author: Attorney Lonnie Roach has been practicing law for over 29 years. He is Superlawyers rated by Thomson Reuters and is Top AV Preeminent® and Client Champion rated by Martindale Hubbell. Through his extensive litigation Mr. Roach obtained board certifications from the Texas Board of Legal Specialization. Lonnie is admitted to practice in the United States District Court – all Texas Districts and the U.S. Court of Appeals, Fifth Circuit. Highly experienced in Long Term Disability denials and appeals governed by the “ERISA” Mr. Roach is a member of the Texas Trial Lawyers Association, Austin Bar Association, and is a past the director of the Capital Area Trial Lawyers Association (Director 1999-2005) Mr. Roach and all the members of Bemis, Roach & Reed have been active participants in the Travis County Lawyer referral service.
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