Whether your disability pay is taxable depends on the source and your total income

Not all disability payments are treated the same way by the IRS. Some disability income is taxable, some is not, and some is taxable only if your total income crosses a certain threshold. The rules differ depending on whether you receive Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), workers' compensation, private disability insurance, or a combination of these.

The most important factor is where the money comes from. Money you paid into through payroll taxes during your working years is treated differently than money from a program funded by general tax revenue. Your filing status and your total income from all sources also matter.

Key Takeaways

  • SSDI may be taxable if your combined income (including half your SSDI benefit) exceeds $25,000 for single filers or $32,000 for married couples filing jointly.
  • SSI is never taxable income, and SSI payments do not count toward the income threshold that makes SSDI taxable.
  • Workers' compensation and most private disability insurance are not taxable, but they can affect whether your SSDI becomes taxable.
  • You must report SSDI on your tax return even if none of it is taxable, because the IRS uses that information to calculate your tax liability.
  • The Social Security Administration sends Form SSA-1099 each January showing how much SSDI you received in the previous year.

How SSDI becomes taxable based on your income level

The IRS uses a formula called combined income to determine whether your SSDI is taxable. Combined income includes your adjusted gross income, nontaxable interest, and half of your SSDI benefit. If your combined income exceeds a threshold amount, a portion of your SSDI becomes taxable.

For single filers, the threshold is $25,000. For married couples filing jointly, it is $32,000. For married people filing separately, it is $0 — meaning any SSDI is potentially taxable if you file separately from your spouse.

If your combined income is below the threshold, your SSDI is not taxable. If it exceeds the threshold, up to 50 percent of the amount over the threshold becomes taxable, but never more than 50 percent of your total SSDI benefit. If your combined income is very high, up to 85 percent of your SSDI can become taxable.

The calculation is complex, and the IRS provides a worksheet in the instructions for Form 1040 to help you work through it. A tax professional can also calculate this for you.

SSI is never taxable, but it affects SSDI taxation

If you receive Supplemental Security Income (SSI), that money is never taxable income. SSI is a needs-based program funded by general tax revenue, not by payroll taxes, so the IRS does not treat it as income.

However, SSI does not count toward the combined income threshold that determines whether your SSDI is taxable. This means you can receive both SSI and SSDI, and only the SSDI portion is considered when calculating whether you owe tax on your SSDI.

If you receive both programs, you will receive two separate forms each January: Form SSA-1099 for your SSDI and a notice showing your SSI payments. Only the SSDI amount goes into the combined income calculation.

Other disability income and how it affects your taxes

Workers' compensation is generally not taxable income. If you receive workers' compensation for a work-related injury or illness, you do not report it as income on your tax return. However, if you also receive SSDI, the Social Security Administration may reduce your SSDI payment by a portion of your workers' compensation — a rule called the Government Pension Offset or Offset rules. The reduction itself is not taxable, but the workers' compensation counts toward your combined income when determining whether your SSDI is taxable.

Private disability insurance — coverage you purchased yourself or that your employer provided — is usually not taxable if you paid the premiums with after-tax dollars. If your employer paid the premiums and you did not report them as income, the benefits are taxable. Like workers' compensation, private disability payments count toward your combined income for SSDI tax purposes.

Veterans' disability benefits are not taxable income. If you receive disability compensation from the Department of Veterans Affairs, you do not report it on your tax return, and it does not count toward the combined income threshold for SSDI taxation.

What form you receive and what to do with it

Each January, the Social Security Administration sends you Form SSA-1099 showing the total SSDI you received in the previous calendar year. This form lists the amount in Box 5. You must report this amount on your tax return even if none of it is taxable, because the IRS matches the form against your return.

If you did not receive an SSA-1099 by early February, you can request one by calling Social Security at 1-800-772-1213 or by visiting your local Social Security office. You can also create an account at ssa.gov to view and print your form online.

When you file your tax return, you report your SSDI on Form 1040, line 5b. The instructions for that line include a worksheet to calculate how much of your SSDI is taxable. If you use tax software, it will walk you through the combined income calculation.

When you might owe tax on your SSDI

You are most likely to owe tax on SSDI if you have other sources of income in addition to your disability payment. Common sources include wages from part-time work, self-employment income, interest or dividends, rental income, or a pension.

For example, if you are single and earn $15,000 in wages plus receive $18,000 in SSDI, your combined income is $15,000 plus $9,000 (half your SSDI) equals $24,000. This is below the $25,000 threshold, so your SSDI is not taxable. But if you earned $20,000 in wages instead, your combined income would be $29,000, which exceeds the threshold by $4,000. Up to 50 percent of that excess — $2,000 — becomes taxable.

If you are married and file jointly, the same calculation applies, but your threshold is $32,000 instead of $25,000. If you file separately from your spouse, any SSDI is potentially taxable.

Planning ahead if you have other income

If you work part-time or have other income, you may want to estimate your combined income before the end of the year. Knowing whether your SSDI will be taxable helps you decide whether to increase tax withholding from your wages or make estimated tax payments.

Some people in this situation choose to have taxes withheld from their SSDI payment itself. You can request this by completing Form W-4V and submitting it to Social Security. You can choose to have 7, 10, 15, or 25 percent of your SSDI withheld for federal income tax. This does not change how much of your SSDI is taxable — it just spreads the tax payment across the year instead of paying it all when you file.

A tax professional or your local IRS office can help you estimate your tax liability and decide on the best withholding strategy for your situation.

Frequently Asked Questions

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

Not necessarily. If SSDI is your only income and none of it is taxable, you do not have to file. However, if you have other income or if part of your SSDI is taxable, you must file. The IRS provides a tool on irs.gov to help you determine whether you are required to file.

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

The IRS receives a copy of your SSA-1099 and will notice if you do not report it. This can trigger an audit or a notice of underreported income. Even if your SSDI is not taxable, reporting it shows the IRS that you received it and helps avoid problems later.

Can I deduct medical expenses related to my disability?

Yes, if your medical expenses exceed 7.5 percent of your adjusted gross income, you can deduct the amount over that threshold. This is separate from whether your SSDI is taxable. Keep receipts for all disability-related medical costs, including doctor visits, medications, therapy, and equipment.

If my SSDI is reduced because of workers' compensation, is the reduction taxable?

No. The reduction itself is not income and is not taxable. However, the workers' compensation you receive counts toward your combined income when determining whether your remaining SSDI is taxable.

What if I disagree with the amount shown on my SSA-1099?

Contact Social Security to verify the amount. You can call 1-800-772-1213, visit your local office, or create an account at ssa.gov to review your payment history. If there is an error, Social Security will send you a corrected form.