Social Security Disability Insurance (SSDI) may be taxable if half of your benefits plus your other income exceeds $25,000 for an individual, or $32,000 if you’re married and filing jointly. Disability income from insurance policies is taxable if the premiums were paid by an employer or a flexible spending account. States might tax disability income.
Supplemental Security Income (SSI) is a separate federal program that provides monthly income to people with limited resources and low incomes and who are blind, have a qualifying disability, or are 65 or older. SSI is not taxable.
How much of my Social Security disability income (SSDI) is taxable?
Up to 85% of your SSDI benefits may be taxable. But that doesn’t mean you face an 85% tax rate on your disability income.
For example, if your annual Social Security disability benefit is $20,000 and 50% of it is taxable, you won’t lose half to taxes. It means you pay taxes on only $10,000 of your benefits.
Your actual tax bill depends on which tax bracket you’re in — and federal taxes are progressive, so being in a higher tax bracket doesn’t mean that rate applies to all of your income. IRS Publication 915 explains how Social Security benefits are taxed, as does most major tax software.
How much of my private disability insurance income is taxable?
Many people purchase disability insurance policies at work or on their own. The income from these policies may be taxable as well.
If your employer paid all of the premiums on the policy, all of the disability income you get from the policy is taxable.
If your employer paid some of the premiums and you paid some of the premiums, only the income attributable to the employer’s premium payments is taxable.
If you paid all of the premiums on the policy, none of the income you receive from the policy is taxable.
If you paid the premiums from a flexible spending account (FSA) or other cafeteria plan that gives you a tax deduction for paying the premiums, then the disability income from the policy is taxable.
Payments you get from a welfare fund, state sickness or disability fund, or employer or employee association are taxable.
Accelerated death benefits you receive from a life insurance policy are not federally taxable.
State taxes on disability income
Where you live determines whether you owe state taxes on Social Security disability income or income from disability insurance policies.
Most states don’t tax Social Security disability income, and states that do tax it typically exempt a percentage or a dollar amount.
States vary on how they treat disability income. For instance, in California, disability income is generally not taxable unless the state believes it has become a substitute for unemployment benefits
. New York usually does not tax the first $20,000 of disability income.