Tax season can be stressful for a number of reasons. For those of you dealing with Social Security disability insurance (SSDI), the situation can seem mired in abstruse complexities. Fear not. There are plenty of resources online to help guide you through the process and there are skilled professionals to assist you in tough situations. Accountants can be helpful (of course), but skilled attorneys can sometimes be useful in situations where legal action becomes necessary. So, what are some of the complexities surrounding SSDI?
Income Ranges
For starters, determining whether you need to pay taxes on your SSDI benefits depends on a number of factors, including your yearly income and your marriage status. If, after combining your income and half your SSDI, you bring in less than $25,000 a year as a single person, you need not worry about paying taxes on your benefits. But if you make more than that amount (up to $34,000) you will likely have to pay taxes on half your SSDI. And if your yearly income (including half your SSDI) is higher than $34,000, you will probably have to pay taxes on 85 percent of your SSDI benefits.
The situation is slightly different when considering married couples. If you file jointly as a married couple, you can avoid paying taxes on your benefits, if you and your partner have a combined income that is less than $32,000 (after adding half your SSDI). Fifty percent of your SSDI will be taxed if your combined income lies somewhere between $32,000 and $44,000. If you and your partner’s combined income exceeds $44,000, then 85 percent of your SSDI will likely be taxed.
Lump Sum Payments
In some cases, you may get a lump sum as back-pay for a previous year’s benefits. This may be overwhelming, as the question immediately emerges: how does one tax a lump sum derived from benefits attached to another fiscal year? Well, to begin with, it should be noted that a lump sum cannot simply be retroactively written into a former tax statement – that is, you can’t simply go back and amend your 2013 tax return if you’ve received the benefits this year. Instead, you might have to include the lump sum in the current year’s benefit taxability calculations.
Lump-Sum Election Method
However, it needs to be stressed, there is a method for potentially reducing the tax burden imposed by the sudden surge in income that occurs with a lump-sum back-payment. With the lump-sum election method, you might be able to reduce the taxable portion of your benefits for the current year – though this might not be the case. Before going down this path, you must first go through various steps to determine if this method results in a lower tax payment.
First, you must go back to the old tax return and recalculate the taxable portion of your benefits, adding the lump-sum to that year’s benefits. Once you determine the taxable benefits for the previous tax return (as altered by the addition of the lump sum), you subtract that taxable portion from the total benefits for that year. The amount that remains is then included in the taxable portion of the benefits for the current year. If this saves you money on taxes, you should use this method. If not, you should avoid using this method. For a more in-depth analysis of the lump-sum election method, you can read through Publication 915, entitled Social Security and Equivalent Railroad Retirement Benefits.
SSI
It should briefly be mentioned that Supplemental Security Income (SSI) is, as a rule, untaxable. This is because SSI is strictly assistance given to those in need. It goes to those people with very little means. And, as government assistance, it is not sourced in income taxes you paid. Instead, it derives from tax revenue. As such, it is non-taxable.
If you are in the midst of a legal dispute with the SSA, you might be interested in retaining an experienced attorney who understands the complicated sphere of tax law.
