A lump-sum retroactive payment of Social Security Disability Insurance (SSDI) may be includable in taxable income, depending on the amount and your other income and deductions. You sometimes must wait years before the Social Security Administration approves your SSDI benefits, so that first check can be many thousands of dollars.
The Base Amount
At the end of the year, you’ll get a Form SSA-1099 showing your SSDI benefits for that year. Add half of the amount shown to any other income (including tax-exempt income) you may have received. If you are filing a joint tax return, add all of your spouse’s income as well. If the total exceeds $25,000 (single taxpayer) or $32,000 (married filing jointly), you have exceeded the "base amount" and part of your SSDI benefits may be taxable.
The Taxable Amount
If you reach the base amount, at least 50 percent of your benefits are includable in taxable income. However, if the total of half your benefits combined with your other income exceeds $34,000 (single) or $44,000 (joint), 85 percent of your benefits are includable in taxable income. If you paid an attorney to help you get your benefits, that cost is deductible.
The Lump-Sum Election
When you receive your retroactive SSDI payment, a portion of it may be for prior years. While you must include the entire amount in your current year’s tax return, there is an election you can make to refigure your prior years’ taxes as if the payment had actually been received in those years. It’s complicated, but if the as-if inclusion in prior years would reduce the taxable amount of the payment you received this year, you can reduce the taxable amount in the current year. You don’t file amended returns. Because of its complexity, you should have your accountant figure it out.
Amount of Retroactivity
SSDI benefits may be paid retroactively to 12 months before the date of the application as long as your disability began on that date or earlier. For example, if you became disabled on Jan. 1, 2010, and you filed your application on Jan. 1, 2012, the benefits will be retroactive back to Jan. 1, 2011. The amount you receive is based on how much you paid into the system while you were working.
Richard Friedkin has many years of experience as a Certified Public Accountant, a Certified Financial Planner and a corporate CEO. He has been a writer for more than 30 years, writing everything from dense technical memos to whimsical children's stories. Friedkin's work has been published locally and performed on stage.