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.
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 2016 tax year, individuals earning under $10,350 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 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 2016 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 $15,500. 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
Whether or not LTD benefits are taxable is contingent on if the plan was paid for with pre- or post-tax dollars. Most often, LTD plans are paid for with pre-tax dollars. If your employer sponsors your plan, then the IRS views the benefits as an indirect way of your employer paying you. If you are receiving LTD benefits paid for by your employer, you should receive a W-2 or Disability Income Report. If the premiums were paid for with post-tax dollars, then LTD benefits are not taxable. If the premium is partly paid for the employee (post-tax) and partly paid by the employer (pre-tax), tax liability will be divided proportionally. By the same principle, premiums are deductible if you are paying for your own insurance.
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.