Whether your Social Security benefits are taxed depends on the type of benefit you receive and what your financial situation is outside of those benefits. Social Security benefits can include retirement, disability, and survivors’ benefits, but not all of them are taxed.
Your benefits may be taxable if the total of half your benefits plus all of your other income is greater than the base amount for your filing status. If you are single, the head of your household, or a qualifying widow/widower, your base amount is $25,000. If you are married filing separately and you lived apart from your spouse for the entire year, your base amount is $25,000. If you are married and filing jointly, your base amount is $32,000. If you are married and filing separately and lived with your spouse at any time during the year, your base amount is $0.
Social Security benefits are usually taxed when you have other income that is substantial, your monthly benefits notwithstanding. This additional income can include interest, dividends, self-employment, and other taxable income that you are required to report on your tax return.
Disability benefits are taxable in some circumstances, and the good news is that you will never have to pay taxes on all your disability benefits. Supplemental Security Income (SSI) benefits are not taxable. SSI is a needs-based program designed to help low- and no-income individuals survive. In order to qualify for SSI benefits, you must have few assets, if any. SSI beneficiaries, by definition, do not have sufficient financial resources to meet the taxation threshold.
If you receive SSDI benefits and are required to file an individual tax return, your SSDI benefits will be taxed the same as other Social Security benefits. If you receive a lump-sum backpay payment, do not claim the full amount for a single year on your tax return. If you do, declaring the whole payment will likely put you in a higher tax bracket, and you may end up paying more taxes than you are liable for that year.
Instead of claiming the lump-sum payment in one tax year, you should file amended returns each year for the years that the backpay covered, and only include the current year’s portion on the current year’s income tax return.
When preparing for taxes each year, keep in mind that SSA is not required to withhold taxes from your SSDI payments. You can, however, contact SSA and request that they withhold taxes from the monthly benefits you receive.
Consider contacting a professional tax advisor or consultant to make sure any Social Security benefits you receive are properly accounted for in any tax return you are required to file.