Whether the IRS taxes your disability income depends on your total income and filing status

The IRS taxes Social Security Disability Insurance (SSDI) the same way it taxes retirement benefits: based on your "combined income," not on whether you receive disability payments. Combined income is the sum of your adjusted gross income, nontaxable interest, and half your SSDI benefits. If that total exceeds a threshold set by your filing status, you owe federal income tax on a portion of your benefits.

The thresholds are fixed and do not change year to year. For a single filer, the first threshold is $25,000; the second is $34,000. For married filing jointly, the thresholds are $32,000 and $44,000. If your combined income falls below the first threshold for your status, you pay no federal tax on your SSDI. If it exceeds the first threshold, up to 50 percent of your benefits become taxable. If it exceeds the second threshold, up to 85 percent becomes taxable.

Some states also tax SSDI, though most do not. The states that do tax disability benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. State tax rules differ from federal rules and vary by state.

Key Takeaways

  • The IRS taxes SSDI only if your combined income (adjusted gross income plus half your SSDI) exceeds $25,000 (single) or $32,000 (married filing jointly).
  • If you are below the first threshold, you owe no federal tax on your SSDI, even if you have other income.
  • Between the first and second threshold, up to 50 percent of your benefits are taxable; above the second threshold, up to 85 percent are taxable.
  • Eleven states tax SSDI using their own rules; most states do not tax disability benefits at all.
  • You can request that the Social Security Administration withhold federal income tax from your monthly SSDI payment to avoid a tax bill at filing time.

How combined income is calculated

Combined income is not the same as your total income. The IRS defines it as your adjusted gross income (AGI) plus any nontaxable interest income plus half of your SSDI benefits for the year.

If you have a job and earn wages, those wages count toward your AGI. If you have interest from a savings account or certificate of deposit, that counts. If you have rental income, capital gains, or income from a pension, those count too. Nontaxable interest — such as interest from municipal bonds — also counts toward combined income for SSDI tax purposes, even though it does not count for other tax calculations.

Half your SSDI benefits are always included in the combined income calculation, regardless of whether those benefits are taxable. This is the part that confuses many recipients. If you received $15,000 in SSDI for the year, $7,500 of that amount is added to your other income to determine whether any of your benefits are taxable.

Example: You are single and earned $20,000 in wages. You received $12,000 in SSDI. Your combined income is $20,000 (wages) + $6,000 (half of SSDI) = $26,000. Because $26,000 exceeds the $25,000 threshold, some of your SSDI is taxable. You would owe tax on up to 50 percent of your benefits.

The two-tier tax calculation

Once you know your combined income exceeds the first threshold, the IRS uses a two-step formula to determine how much of your SSDI is taxable. The formula is the same for all filers, but the thresholds differ by filing status.

First tier: Take the amount by which your combined income exceeds the first threshold. Multiply that by 50 percent. This is the amount of SSDI that becomes taxable in the first tier, up to a maximum of 50 percent of your total SSDI for the year.

Second tier: If your combined income also exceeds the second threshold, take the amount by which it exceeds the second threshold. Multiply that by 85 percent. Add this to the amount from the first tier. The total cannot exceed 85 percent of your SSDI for the year.

Example: You are single with combined income of $40,000. Your SSDI for the year was $18,000. First tier: ($40,000 − $25,000) × 50% = $7,500 in taxable SSDI. Second tier: ($40,000 − $34,000) × 85% = $5,100. Total taxable: $7,500 + $5,100 = $12,600. But 85 percent of $18,000 is $15,300, so the cap does not explore here. You would report $12,600 of your $18,000 SSDI as taxable income.

Withholding taxes from your SSDI payment

You do not have to wait until tax time to pay tax on your SSDI. You can ask the Social Security Administration to withhold federal income tax directly from your monthly benefit payment. This reduces the amount you receive each month but prevents a large tax bill when you file your return.

To request withholding, complete Form W-4V (Voluntary Withholding Request) and submit it to your local Social Security office, mail it to Social Security, or upload it through your my Social Security account online. You can choose to withhold 7, 10, 15, or 22 percent of your benefit. You can change or stop withholding at any time by submitting a new form.

Withholding is voluntary, and you are not required to do it. However, if you have other income and expect to owe tax on your SSDI, withholding can make tax filing simpler and help you avoid underpayment penalties.

State income tax on SSDI

Most states do not tax SSDI benefits. However, Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont do tax some or all disability benefits. Each state uses different rules to determine how much is taxable.

Some states follow the federal formula. Others tax SSDI only if your income exceeds a state-specific threshold. A few states tax SSDI the same way they tax other income, with no special calculation. If you live in one of these eleven states, you will need to check your state's tax department website or contact them directly to understand your state tax obligation on SSDI.

If you move to a different state during the year, you may owe tax to both your old state and your new state for the portion of the year you lived in each. Some states offer credits to prevent double taxation, but you must file in both states to claim the credit.

Reporting SSDI on your tax return

You report SSDI on your federal tax return using Form 1040 and Schedule 1 (Additional Income and Adjustments to Income). The Social Security Administration sends you a Form SSA-1099-SM (Social Security Benefit Statement) by January 31 each year showing the total SSDI you received.

You do not report the full amount shown on the SSA-1099-SM as income. Instead, you use the two-tier calculation described above to determine the taxable portion, then report only that amount on your return. If you have other income sources, you may need to file a more complex return or use tax software that handles SSDI calculations.

If you received SSDI for only part of the year — for example, if you started receiving benefits in June — the SSA-1099-SM will show only the benefits you received. Your combined income calculation uses only the SSDI you actually received, not an annualized amount.

What happens if you do not report taxable SSDI

If you owe tax on your SSDI and do not report it, the IRS will eventually identify the discrepancy through the SSA-1099-SM that Social Security files with them. The IRS will send you a notice of tax due, plus interest and penalties. The penalty for underpayment of tax is typically 20 percent of the unpaid tax, plus interest that compounds daily.

If you cannot pay the full amount owed, you can set up a payment plan with the IRS. You can also request an installment agreement, which allows you to pay over time. The IRS charges a setup fee for payment plans, which varies depending on how you set it up.

If you believe you made an error on a prior return, you can file an amended return using Form 1040-X (Amended U.S. Individual Income Tax Return). You have three years from the original filing date to amend a return and claim a refund.

Frequently Asked Questions

Can I reduce my SSDI tax by earning less money?

Yes. Because combined income determines whether your SSDI is taxable, reducing other income sources can lower or eliminate your tax liability. If you are working, earning less in wages or self-employment income will lower your combined income. If you have investment income, you might defer selling assets or restructure your portfolio to reduce taxable gains in a given year.

Does Supplemental Security Income (SSI) count toward the SSDI tax thresholds?

No. SSI is a separate program and is not taxable by the IRS. Only SSDI is subject to the combined income test. If you receive both SSI and SSDI, only the SSDI portion is included in the combined income calculation.

What if I am married and file separately?

If you are married and file a separate return, the threshold for taxability is $0. This means any combined income at all will result in some of your SSDI being taxable. Filing jointly almost always results in lower tax on SSDI. Consult a tax professional before choosing to file separately if you receive SSDI.

Do I have to file a tax return if my only income is SSDI?

Not necessarily. If SSDI is your only income and your combined income is below the first threshold for your filing status, you have no tax liability and are not required to file. However, if you had taxes withheld from your SSDI, you should file to claim a refund of the overpayment.

Can I deduct medical expenses related to my disability?

Yes, but only if your total medical expenses exceed 7.5 percent of your adjusted gross income. You must itemize deductions on Schedule A to claim medical expenses. Most people with SSDI use the standard deduction instead, which is simpler. A tax professional can tell you which approach saves you more money.