Most SSDI recipients pay no federal income tax on their benefits

You do not owe federal income tax on your SSDI payments straightforward because you received them. The Social Security Administration does not withhold income tax from SSDI checks, and most people who receive only SSDI do not file a federal tax return at all.

However, SSDI can become taxable if you have other income. The IRS uses a formula called "combined income" to decide whether any portion of your benefits counts as taxable income. This formula is the reason some SSDI recipients end up owing taxes while others do not, even when they receive the same monthly benefit amount.

The tax treatment of SSDI is different from how the IRS treats Social Security retirement benefits, but the rules work the same way. Understanding your combined income and whether you cross the threshold that triggers taxation is the first step to knowing what you owe.

Key Takeaways

  • SSDI is not automatically taxable, and most recipients who have no other income pay no federal income tax on their benefits.
  • Your SSDI becomes taxable only if your combined income (SSDI plus other earnings and unearned income) exceeds a threshold set by the IRS.
  • Combined income includes wages, self-employment income, interest, dividends, and certain other sources, but not all income counts the same way.
  • If you have other income, you may owe taxes on part of your SSDI even if you did not owe taxes before you started receiving benefits.
  • The IRS worksheet for calculating taxable SSDI is complex, and a tax professional or the Social Security Administration can help you determine what you owe.

How the IRS decides if your SSDI is taxable

The IRS uses a two-tier system to determine whether SSDI becomes taxable income. The thresholds are $25,000 for a single filer and $32,000 for married couples filing jointly. These thresholds have not changed since 1984.

To find your combined income, add your SSDI benefits plus half of your SSDI plus all your other income (wages, self-employment income, interest, dividends, rental income, and certain other sources). If that total exceeds the threshold for your filing status, some of your SSDI is taxable.

The formula is counterintuitive: you add half your SSDI to itself, which means SSDI is counted twice in the combined income calculation. This is why someone with $20,000 in wages and $15,000 in SSDI can owe taxes on their SSDI, even though their total income is only $35,000.

If your combined income is below the threshold, you owe no federal income tax on your SSDI, regardless of how much you received. If it exceeds the threshold, you use an IRS worksheet to calculate the taxable portion — it is never more than 85 percent of your benefits.

What counts as income for the combined income calculation

Wages and self-employment income count fully toward combined income. If you work while receiving SSDI, your earnings are added dollar-for-dollar to the calculation. This is true even if you are using a work incentive like the Plan to Achieve Self-Support (PASS) or Impairment Related Work Expenses (IRWE) to reduce your SSDI payment.

Unearned income — interest, dividends, capital gains, rental income, and distributions from retirement accounts — also counts. If you withdraw money from a traditional IRA or 401(k), that withdrawal counts as income for the combined income calculation, even if you do not owe income tax on it for other reasons.

Income that does not count includes Supplemental Security Income (SSI), Medicaid, food stamps, housing information, and other means-tested benefits. Veterans' benefits, workers' compensation, and certain other payments also do not count toward combined income.

Tax-exempt interest (such as interest from municipal bonds) counts toward combined income even though it is not taxable income. This is a common surprise for SSDI recipients who hold tax-exempt bonds.

The two-tier tax calculation and how much SSDI becomes taxable

If your combined income exceeds the threshold, the IRS uses a two-tier formula to calculate the taxable portion of your SSDI. The first tier taxes up to 50 percent of your benefits; the second tier can tax up to an additional 35 percent, for a maximum of 85 percent of your SSDI.

The first tier applies when your combined income exceeds the threshold by up to $9,000 (for single filers) or $12,000 (for married filing jointly). In this range, the taxable portion is the lesser of (1) 50 percent of the excess over the threshold, or (2) 50 percent of your total SSDI benefits.

The second tier applies when your combined income exceeds the first-tier threshold by more than $9,000 or $12,000. In this range, you add 85 percent of the excess to the amount already calculated in the first tier, up to a maximum of 85 percent of your total SSDI.

Because the formula is complex, the Social Security Administration publishes a worksheet in IRS Publication 915 that walks through the calculation step by step. Many tax software programs also include this calculation, and a tax professional can compute it for you.

When you must file a tax return even if SSDI is not taxable

You must file a federal tax return if your gross income exceeds the standard deduction for your age and filing status, even if none of that income is SSDI. For 2024, the standard deduction is $14,600 for a single person under 65 and $17,550 for a single person 65 or older.

If you have wages, you must file if your wages exceed $400, regardless of your age or other income. If you are self-employed, you must file if your net self-employment income is $400 or more.

You may also want to file even if you are not required to, because you may be due a refund. If you had taxes withheld from wages or made estimated tax payments, filing allows you to recover that money.

State income tax and SSDI

Most states do not tax SSDI benefits, but a few do. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont tax SSDI the same way the federal government does — using the combined income formula and the same thresholds.

If you live in one of these states and your combined income exceeds the state threshold, you may owe state income tax on part of your SSDI even if you owe no federal tax. Some states have different thresholds or different formulas than the federal government, so check your state's tax agency website or ask a tax professional.

If you moved to a new state during the year, you may owe tax to both your old state and your new state, depending on when you moved and each state's rules. This is another reason to work with a tax professional if your situation is complex.

How to report SSDI on your tax return

SSDI benefits appear on Form SSA-1099, which the Social Security Administration sends to you by January 31 each year. This form shows the total SSDI you received in the previous calendar year in Box 5.

You report this amount on your federal tax return using Form 1040 and Schedule 1. You enter the total SSDI from Box 5 of your SSA-1099 on Schedule 1, line 5a. If any of your SSDI is taxable, you enter the taxable portion on line 5b.

If you use tax software, the program will ask you for the total SSDI and calculate the taxable portion using the IRS worksheet. If you file by hand or work with a tax professional, they will use Publication 915 to determine the taxable amount.

Keep your SSA-1099 with your tax records. If the IRS questions your return, you will need to show that the SSDI amount matches what Social Security reported.

Frequently Asked Questions

Can I reduce my SSDI taxes by earning less money?

Yes. If your combined income is just above the threshold, reducing other income (such as by working fewer hours) can lower or eliminate the tax on your SSDI. However, if you reduce your earnings below the SSDI substantial gainful activity level, your SSDI payment may increase, which could offset the tax savings. Work with a benefits planner before making changes to your work.

What if I received SSDI for only part of the year?

Your SSA-1099 will show only the SSDI you received during the months you were may be able to access. If you started or stopped SSDI mid-year, the form reflects that. Use the amount on your SSA-1099, not an estimate, when calculating your combined income.

Do I owe taxes on SSDI back pay?

Yes. If you receive a lump-sum payment for SSDI back pay, the entire amount is included in your combined income for the year you receive it, even if it covers multiple years. This can push you into a higher tax bracket. Ask the Social Security Administration about spreading the back pay over multiple years using Form SSA-131 if you expect a large payment.

What happens if I do not file a tax return when I owe taxes on SSDI?

The IRS can assess penalties and interest on unpaid taxes. If you owe a small amount, you may be able to set up a payment plan. If you did not file and think you may owe, contact the IRS or a tax professional to determine your options and file as soon as possible.

Can a tax professional help me figure out if my SSDI is taxable?

Yes. A CPA, enrolled agent, or tax attorney can review your income, calculate your combined income, and determine the taxable portion of your SSDI. Many offer free or low-cost consultations. You can also call the Social Security Administration's toll-free number to ask about your specific situation, though they cannot provide tax information.