Most people on SSDI do not owe federal income tax on their benefits

Whether you pay taxes on your SSDI benefits depends on your total income for the year. If SSDI is your only income, you almost certainly will not owe federal income tax. The threshold is high enough that most SSDI recipients fall below it. However, if you have other income—from work, pensions, interest, or other sources—you may owe taxes on part of your SSDI benefits, or on the other income itself, or both.

The rule is this: you combine your SSDI with your other income using a specific formula called "combined income." If that combined income exceeds a certain threshold, a portion of your SSDI becomes taxable. The thresholds are $25,000 for single filers and $32,000 for married couples filing jointly. These thresholds have not changed since 1984.

The key word is "portion." Even when SSDI is taxable, you do not pay taxes on all of it. At most, 85 percent of your benefits can be taxed. Most people whose SSDI is taxable end up paying tax on only 50 percent of their benefits.

Key Takeaways

  • If SSDI is your only income and you are single, you will not owe federal income tax unless your combined income exceeds $25,000.
  • Combined income includes your SSDI benefits plus half of your SSDI plus any other income you received that year.
  • If you have work income, a pension, or investment income, you may owe taxes on that income even if your SSDI is not taxable.
  • Social Security sends you a form SSA-1099 each January showing how much SSDI you received; you use this to file your tax return.
  • Some states do not tax SSDI at all, while others tax it the same way the federal government does.

How combined income is calculated

The Social Security Administration uses a specific formula to determine whether your SSDI is taxable. It is not the same as your adjusted gross income on your tax return. Instead, you calculate "combined income" by taking your adjusted gross income, adding back certain deductions, and then adding half of your SSDI benefits.

Here is what goes into combined income: your wages from work, your net self-employment income, your taxable interest, your dividends, your capital gains, your taxable pensions, your annuities, your rental income, and half of your SSDI benefits. Then you subtract certain exclusions—mainly income from U.S. savings bonds used for education and foreign earned income exclusions, if you have them.

The result is your combined income. If it is below the threshold for your filing status, none of your SSDI is taxable. If it exceeds the threshold, you move to the next calculation to figure out how much is taxable.

When SSDI becomes taxable

Once your combined income exceeds the threshold, the amount of SSDI that becomes taxable depends on how far over you are. The calculation has two tiers, and it is complex enough that most people use tax software or a tax preparer to work through it.

In the first tier, if your combined income is between the threshold and $9,000 above it (for single filers; $12,000 for married filing jointly), up to 50 percent of your SSDI can be taxable. In the second tier, if your combined income exceeds that second threshold, up to 85 percent of your SSDI can be taxable. However, the total amount of SSDI that is taxable cannot exceed 85 percent of your total benefits for the year.

Example: You are single and have $30,000 in combined income. Your threshold is $25,000, so you are $5,000 over. In the first tier, you would calculate 50 percent of the amount over the threshold, which is $2,500. This is the amount of SSDI that becomes taxable. You would report this on your tax return.

Other income you receive while on SSDI

Work income, pensions, and investment income are all taxable to you regardless of whether your SSDI is taxable. If you work while receiving SSDI, you owe income tax on your wages. If you have a pension or annuity, you owe income tax on those payments. If you have interest or dividends, those are taxable too.

Work income also affects your SSDI benefits themselves through a different rule called the "substantial gainful activity" test. If you earn more than a certain amount per month (the limit changes each year), Social Security may determine that you are working and reduce or stop your benefits. This is separate from the tax question, but it is important to know about if you are working while on SSDI.

Many people on SSDI have little or no other income, so the question of whether SSDI itself is taxable is moot. But if you do have other income, you need to report all of it on your tax return, and you may owe tax on it even if your SSDI is not taxable.

State taxes on SSDI

Thirteen states tax SSDI benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. The rules vary by state. Some states follow the federal formula exactly. Others tax SSDI only if your income exceeds a higher threshold. A few states tax SSDI but then allow you to deduct it, which effectively means no tax.

If you live in one of these states and your SSDI is taxable under federal rules, check your state's tax instructions or contact your state tax authority to see whether you owe state tax as well. If you live in any other state, your SSDI is not subject to state income tax.

Some states that do not tax SSDI still require you to file a state return if you have other income. The state return itself is free to file, but you need to know the rules for your state.

How to report SSDI on your tax return

Each January, Social Security sends you a form SSA-1099 showing how much SSDI you received in the previous year. This form goes to you and to the IRS. You use the amount on the SSA-1099 to calculate your combined income and determine whether any of your SSDI is taxable.

If you file a federal tax return, you report your SSDI on line 5b of Form 1040. If none of your SSDI is taxable, you enter zero on that line. If some of it is taxable, you enter the taxable amount. Tax software will walk you through the calculation, or a tax preparer can do it for you.

You do not need to file a federal tax return if your income is below the filing threshold for your age and filing status. However, if you have taxes withheld from other income (like wages), you may want to file anyway to get a refund. The IRS has a tool on its website to help you determine whether you need to file.

If you cannot pay the tax you owe

If you owe tax on your SSDI or other income but cannot pay it all at once, you have options. You can set up a payment plan with the IRS, either online or by calling 1-800-829-1040. You can also request an installment agreement, which lets you pay over time. The IRS charges interest and penalties on unpaid tax, so paying as soon as you can is best.

If you are having trouble paying, the IRS also has a program called "Currently Not Collectible" status, which temporarily pauses collection while you work on your finances. This does not erase the debt, but it stops the IRS from taking action while you cannot pay.

If you received a notice from the IRS that you owe tax, do not ignore it. Respond within the important date on the notice, even if you cannot pay. The IRS is more willing to work with you if you respond than if you do not.

Frequently Asked Questions

Do I have to file a tax return if I only receive SSDI?

No, not unless your combined income exceeds the filing threshold for your age and filing status. For most people on SSDI with no other income, the filing threshold is higher than their SSDI benefits, so they do not have to file. However, if you have taxes withheld from other income, you may want to file to get a refund.

What if I work part-time while on SSDI? Do I owe taxes?

Yes, you owe income tax on your wages. Your work income is added to your combined income, which may make your SSDI taxable. You also need to report your work income to Social Security, because earning above the substantial gainful activity limit may affect your SSDI benefits themselves.

Can Social Security withhold taxes from my SSDI benefits?

Yes, you can request that Social Security withhold federal income tax from your SSDI payments. You do this by filling out Form W-4V and sending it to your local Social Security office. This can help if you owe tax and want to avoid a large bill at tax time.

If my SSDI is not taxable, do I still report it on my tax return?

You do not have to report it as income if none of it is taxable. However, you may need to report it to calculate your combined income and prove that none of it is taxable. Tax software will handle this automatically.

What happens if I do not report my SSDI on my tax return?

The IRS already knows how much SSDI you received, because Social Security sends them a copy of your SSA-1099. If you file a return and do not report it, the IRS will likely send you a notice. If you do not file a return and should have, the IRS may file one for you or assess a penalty.