The Short Answer: It Depends on Your Total Income

The federal government taxes some disability income and not other disability income, depending on what kind of disability payment you receive and how much total income you have in a year. Social Security Disability Insurance (SSDI) payments may be taxed if your combined income exceeds a certain threshold. Supplemental Security Income (SSI) payments are never taxed by the federal government. Other disability payments—from private insurance, workers' compensation, or veterans' benefits—follow their own rules.

Whether you owe tax on SSDI is not automatic. The IRS uses a formula based on your "combined income," which includes your SSDI, other earnings, and certain non-taxable income added back in. If that number stays below the threshold for your filing status, you pay no federal tax on your disability payments. If it exceeds the threshold, a portion of your SSDI becomes taxable.

Key Takeaways

  • SSI payments are never subject to federal income tax, but SSDI payments may be taxed depending on your total income for the year.
  • The IRS uses a "combined income" formula that includes SSDI, wages, interest, and certain other income to determine whether your disability payments are taxable.
  • If your combined income is below $25,000 (single) or $32,000 (married filing jointly), you typically owe no federal tax on SSDI.
  • Up to 85 percent of your SSDI can become taxable if your combined income is high enough, but the exact amount depends on how far you exceed the threshold.
  • You do not have to pay estimated quarterly taxes on SSDI, but you can request that the Social Security Administration withhold federal tax from your payments.

How the IRS Calculates Combined Income

The IRS does not straightforward add up your SSDI and other income. Instead, it uses a specific formula called combined income, which works like this: take your adjusted gross income (wages, self-employment income, taxable interest, taxable dividends), add back any tax-exempt interest (such as from municipal bonds), and then add half of your SSDI benefits. That total is your combined income.

The thresholds are $25,000 for a single filer and $32,000 for married filing jointly. If your combined income falls below these numbers, none of your SSDI is taxable. If it exceeds them, the IRS taxes a portion of your SSDI—either up to 50 percent or up to 85 percent, depending on how much you exceed the threshold.

Example: You are single and receive $1,200 per month in SSDI ($14,400 per year). You also earn $15,000 from part-time work. Your combined income is $15,000 + (half of $14,400) = $15,000 + $7,200 = $22,200. Since $22,200 is below $25,000, you owe no federal tax on your SSDI that year, even though you have other income.

The Two-Tier Tax Formula for SSDI

Once your combined income exceeds the threshold, the IRS applies a two-tier system. The first tier taxes up to 50 percent of your SSDI. The second tier taxes up to an additional 35 percent (for a total of up to 85 percent). The exact amount depends on how far above the threshold you go.

First tier: If your combined income exceeds the threshold but is below $9,000 more than the threshold (for single filers; $12,000 for married filing jointly), up to 50 percent of the excess amount is taxable, but not more than 50 percent of your SSDI benefits.

Second tier: If your combined income exceeds the first-tier limit, the excess above that point is taxed at 85 percent, but the total amount of SSDI that becomes taxable cannot exceed 85 percent of your benefits.

This two-tier system means that very few people pay tax on more than 85 percent of their SSDI, and most people who exceed the threshold pay tax on far less than that.

SSI Is Never Taxed by the Federal Government

Supplemental Security Income (SSI) is treated differently from SSDI. The federal government does not tax SSI payments under any circumstances, regardless of your other income. This is true even if you have substantial wages, interest, or other income in the same year.

However, SSI recipients should be aware that some states tax SSI, and that SSI has its own income and resource limits that can affect your monthly payment amount. If you receive both SSDI and SSI, only the SSDI portion may be subject to federal tax.

Other Disability Payments and Tax Treatment

Workers' compensation for a work-related injury or illness is not taxable as income by the federal government. If you receive workers' compensation and SSDI at the same time, your SSDI may be reduced (a process called "offset"), but the workers' compensation itself is not taxed.

Veterans' disability benefits paid by the Department of Veterans Affairs are not taxable by the federal government. Like workers' compensation, they do not count as income for the purpose of the SSDI tax formula.

Private disability insurance payments depend on whether the premiums were paid with pre-tax or after-tax dollars. If your employer paid the premiums and deducted them as a business expense, the benefits are taxable. If you paid the premiums with after-tax money, the benefits are usually not taxable.

How to Report SSDI on Your Tax Return

If you receive SSDI, the Social Security Administration sends you a Form SSA-1099-SM by January 31 each year. This form shows the total SSDI you received in the previous year. You use this form to report your benefits on your federal tax return.

If any of your SSDI is taxable, you report it on Form 1040 (the main federal income tax form) or Form 1040-SR (for people age 65 and older). The taxable portion of your SSDI is added to your other income, and you calculate your tax liability as usual.

If you do not normally file a tax return because your income is too low, you may still need to file one if you have taxable SSDI. The IRS provides a worksheet in the instructions to Form 1040 to help you determine whether any of your SSDI is taxable.

Requesting Tax Withholding on SSDI Payments

You do not have to pay estimated quarterly taxes on SSDI. However, if you know that some of your SSDI will be taxable and you want to avoid a large tax bill when you file, you can ask the Social Security Administration to withhold federal income tax from your monthly payments.

To request withholding, complete Form W-4V (Voluntary Withholding Request) and submit it to your local Social Security office or mail it to the address on the form. You can choose to have 7, 10, 12, or 22 percent of your SSDI withheld each month. Once you submit the form, withholding typically begins with your next payment.

You can change or stop withholding at any time by submitting a new Form W-4V. This option is useful if your income changes during the year or if you want to adjust how much tax you are setting aside.

State and Local Taxes on Disability Income

Federal tax rules do not explore to state and local income taxes. Some states do not tax SSDI or SSI at all. Other states tax SSDI the same way the federal government does. A few states have their own rules that differ from federal law.

You should check your state's tax agency website or contact them directly to learn whether your state taxes disability income. If you live in a state with income tax and receive SSDI, you may owe state tax even if you owe no federal tax, or vice versa.

Frequently Asked Questions

Will I owe federal tax on my SSDI if I also work part-time?

Not necessarily. Your wages count toward your combined income, but if your combined income stays below the threshold ($25,000 for single filers), you owe no federal tax on your SSDI. Use the combined income formula to add up your wages, half your SSDI, and any other income to see where you stand.

What if I receive both SSDI and SSI?

Only the SSDI portion may be subject to federal tax. SSI is never taxed by the federal government. If you receive both, calculate your combined income using only the SSDI amount, and report only the taxable portion of SSDI on your tax return.

Can I deduct medical expenses or disability-related costs from my SSDI income?

No. SSDI is not treated as earned income, so you cannot claim the earned income tax credit or deduct work-related expenses. However, you may be able to deduct medical expenses on Schedule A if you itemize deductions and meet the IRS threshold for medical expense deductions.

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

The IRS receives a copy of your Form SSA-1099-SM and will expect to see that income reported. If you do not report it and owe tax, you may face penalties and interest. If you are unsure whether you owe tax, file a return or contact a tax professional to be safe.

Do I need to file a tax return if I only receive SSDI and no other income?

If SSDI is your only income and it is below the standard deduction for your filing status, you do not have to file a federal tax return. However, if you had federal tax withheld from your SSDI, you may want to file to get a refund.