It’s that dreaded time of year again…tax season. For many of you, this year may be different than previous years. If you began receiving Social Security Disability benefits in 2017 you may be wondering if those benefits are taxable. Do you have to report those earnings to the IRS? For the majority of people, the answer is no. However, if you fall into 1 of 3 scenarios the federal government may tax you on your social security disability benefits.
Your benefits may be taxed in the following scenarios:
- You are single and your total income is more than $25,000; or
- You are married and you and your spouse have total income of more than $32,000.; or
- You are married and file a separate tax return.
If you have additional income on top of the disability benefits you receive, you will more than likely be taxed on that income. Remember, if your total income is more than $25,000 your benefits will be taxed.
Here’s how it works. If you fall into scenario 1 and your income is more than $25,000 per year but less than $34,000, you would need to pay taxes on about half of your benefits. If you earn more than $34,000 you may have to pay taxes on up to 85% of your benefits. If you fall into scenario #2 and your combined income is more than $32,000 but less than $44,000 you may have to pay income taxes on about half of your benefits. If your combined income is more than $44,000, you may have to pay taxes on up to 85% of your benefits. In scenario #3 you will most likely need to pay some type of income tax on your benefits.
The amount of combined income will determine the tax bracket you fall into. Recipients of Social Security Disability benefits, if they are taxed, usually fall into the 10-15% tax bracket. Meaning you would only pay about 10-15% taxes on up to 85% of your benefits.
With the new tax system in place this year, it is advisable you should seek advice from a tax professional. They should know how the new tax plan will affect your disability benefits and whether you ever need to file a return. One piece of information you will need to take to your appointment with your tax consultant is the SSA-1099 form. This form will be mailed to you form the Social Security Administration and will contain information about your benefits from the previous year. If you have also been working you would need to take any W-2’s to your appointment as well. Remember, dividends and interest payments, along with any interest you may pay on your mortgage will be needed as well. The best thing to do is to wait until January 31st, which is the last day for statements to be mailed to you. Once you are sure you have all of your statements for 2017 then you should make an appointment with your tax consultant to determine whether you are required to file taxes for that year or not.
If you are required to pay taxes on your disability benefits you may choose to have federal taxes withheld from the benefit check. To do this you would need to complete form W-4V and return it to your local Social Security office. This would help ensure you did not need to pay out money. Some people prefer to have money withdrawn every month while others prefer to pay one lump sum at the end of the year. It is totally a personal preference.
If after meeting with your tax consultant you are still unsure whether your benefits are taxable, you may want to either try a new consultant or call the local social security office directly.