Do I Have to Pay Income Tax on Disability If I Have No Earned Income?

Unearned income can affect taxes on Social Security disability.
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If you're drawing disability benefits, your financial life can get complicated right around tax time. Whether or not you have to report and pay taxes on those benefits depends on several factors, including the amount and source of any other income you received during the year. The type of disability payment -- from public or private insurance -- also plays a part.

Private Disability Insurance

Many employers offer private disability insurance plans as a fringe benefit to employees. With some plans, the employer pays the premiums; others require payment from the covered employee. Ordinarily, any benefits you draw from a private disability plan are tax-exempt, as long as you paid for the insurance with after-tax dollars. If your employer paid the premiums, then the IRS considers any benefits you draw as taxable income. Other income you may receive -- earned or unearned -- does not play a part.

Social Security Disability

When you contribute payroll taxes, you're paying for Social Security disability insurance as well as a retirement savings plan. You may claim disability if you have a medical condition that has lasted, or is expected to last, at least a year, or that will result in your death. As with Social Security retirement, the amount of the benefit depends on how much you've earned over your working life. You can draw disability as well as unearned income; interest and dividends from investments, for example, will have no effect on your disability benefit amount.

Taxes and SSDI

For tax purposes, the IRS treats Social Security disability benefits the same as retirement benefits. To calculate taxes on the benefit, you must add up your combined income: your adjusted gross income -- both earned and unearned -- as well as tax-exempt interest income and one-half of your Social Security benefits. If your filing status is individual, and your combined income exceeds $25,000, then you pay tax on half your benefits. Combined income of over $34,000 means you pay income taxes on 85 percent of your Social Security benefits.

Married Filers

The thresholds for beneficiaries filing married, joint returns are different. If your combined income is more than $32,000, then you pay taxes on 50 percent of your Social Security earnings. You pay taxes on 85 percent of your Social Security if your combined income is more than $44,000. If you're not qualified for Social Security disability and are drawing Supplemental Security Income instead, your benefits are free of income tax.

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