Administered by the Social Security Administration, disability income provides financial support to those who can't work. The disability income you receive isn't part of your adjusted gross income, or AGI, but that doesn't mean you won't have to pay any taxes on the money. Depending on how much money you and your spouse make, you may have to pay taxes on some of your disability income. Many disability recipients choose to play it safe and have taxes withheld from their disability payments. As is always true, you can get your money back if you pay too much tax. If you do, you will receive a disability tax refund at the end of the year.
Disability income isn't part of your adjusted gross income, but that doesn't mean it isn't taxable.
AGI vs. Combined Income
Your AGI is the amount of income you receive throughout the year that is unquestionably taxable income. Sources of income that comprise your AGI include your wages, interest income, dividends and self-employment income. You'll add these figures to arrive at your total gross income and then adjust that number using deductions, such as the self-employment tax credit or the alimony payment deduction. In addition to your AGI, the IRS wants to know your combined income. Your combined income is your AGI plus other income sources that may or may not be taxable, such as your nontaxable interest income and Social Security retirement benefits. Your disability income is not part of your AGI, but it is part of your combined income.
SSI Income Limits and Exceptions
Although the IRS will tax your disability income after your combined income reaches a certain dollar amount, the rules change for dependent children. If your minor child receives disability income and no other income, the IRS won't tax his disability payments. If he has other sources of income, however, you'll have to file a tax return and pay taxes on his behalf. You may get to offset some of the taxes by claiming the child disability tax credit, which helps taxpayers cover the cost of any special care a disabled child may need.
Exceptions also apply to the earned income tax credit. This popular tax credit helps many taxpayers reduce their income tax liability, but it's often misunderstood. The trick is in the name. The credit is called the earned income tax credit because it applies only to income you've literally earned. Although your disability benefits count toward your combined income, they don't count as earned income, and you cannot use them to help you qualify for the earned income tax credit.
2018 Disability Income
To determine if any of your disability benefits will be taxable in 2018, add one half of your disability benefit and all of your other income. If you're single and this figure is less than $25,000, the IRS won't tax any of your benefits. An income level between $25,000 and $34,000 means up to half of your benefits will get taxed. If your income exceeds $34,000, you could pay tax on up to 85 percent of your disability benefits.
Married couples filing jointly won't pay any tax if their income is less than $32,000. They will pay tax on up to 50 percent of their benefits if their income is between $32,000 and $44,000 and will pay tax on up to 85 percent of their benefits if their income exceeds $44,000. Married filers who opt to file their taxes separately usually must pay tax on all of their disability income, so avoid this filing status if you can. You will report the taxable amount of your disability income to the IRS on line 20b of your Form 1040 or line 14b of your Form 1040-A.
2017 Disability Income
While tax laws change all the time, the rules for disability income were the same in both 2017 and 2016 for Social Security disability income. It's still important, however, to make sure you always use the correct tax forms and instructions for the tax year with which you're working. While the rules for Social Security disability taxation haven't changed, many other rules have.
- Zacks: Do Social Security Benefits Count as Gross Income?
- ToughNickel: Taxes: When Your Dependent Child Receives SSI Disability
- Disabilty Benefits Center: Are Disability Benefits Excluded from Gross Income?
- IRS: Disability and Earned Income Tax Credit
- TurboTax: What is Adjusted Gross Income (AGI)?
- IRS: Publication 907 – Tax Highlights for Persons With Disabilities
- IRS: Regular & Disability Benefits
- The Motley Fool: Is Social Security Disability Taxable?
- Do the Disabled Qualify for a Roth IRA?
- Social Security & Disability Benefits for Mentally Handicapped Children
- Legal Ways to Create Unearned Income
- Federal Tax Rules for Short Term Disability Income
- Does Alimony Affect Your Disability Benefits?
- How to Figure Social Security Tax
- Do I Have to Pay Income Tax on Disability If I Have No Earned Income?
- How to File Taxes When One's Child Receives Social Security Benefits