Federal Income Tax and SSDI Benefits
Social Security beneficiaries may have questions about whether their retroactive benefits and/or their ongoing monthly benefits are taxable. This article provides general federal income tax information for SSDI benefits. The information provided in this article should not be used as the basis for specific tax questions.
When an individual receives SSDI retroactive benefits and/or ongoing SSDI monthly benefits, SSA is required to send a 1099 form by February 1 of the following year, specifying how much of the Social Security benefit received in the retroactive payment was really a payment for a prior year (or years). If a fee for an attorney was paid, the 1099 form will list the amount of the attorney fee paid. http://www.irs.gov/pub/irs-pdf/p915.pdf. The taxpayer should double check all numbers on the 1099 form with his or her Notice of Award.
It is a myth that up to 85% of SSDI benefits are taxable. The 85% figure only applies under certain circumstances. See IRS Publication 915 (2013), “Social Security and Equivalent Railroad Retirement Benefits.” If SSDI is the only income in the household, it is unlikely that the SSDI will be taxed for a single person household. If there is a combination of “substantial” wages and/or other income, the non SSDI may be taxable and a portion of the SSDI may be taxed as though it was additional earned income.
The calculations in determining taxable amount are often tricky for non-accountants. It is recommended that the recipient of SSDI benefits hire a tax professional. The investment in hiring a tax professional may pay for itself in tax savings or in the prevention of emotional and financial complications arising from an IRS audit.
There are several resources that are available concerning the tax implications and SSDI. A few of the resources are:
Benefit Planner: Income Taxes and Your Social Security Benefits
Social Security: Calculation and History of Taxing Benefits