5 “Rules” That Determine if Your Disability Income Is Taxable

If you're receiving disability income, you may wonder if it's taxable. The answer: It depends.

Disability income can vary widely, from private insurance benefits to Social Security Disability Insurance (SSDI). Factors like other sources of income, the type of benefits, and even the state where you live can impact whether you owe taxes on your benefits.

For a clearer picture of how your disability income might be taxed and how to keep more cash in your wallet, here are five key points to consider.

Whether disability income is taxable often depends on the source. Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are two common forms of government-provided disability income, and each has different tax rules.

SSI, which assists low-income individuals, is not taxable. However, SSDI may be taxable depending on your total income, including wages, interest, and other forms of income. 

Private disability insurance benefits may also be taxable if your employer paid the premiums and you didn't include those premiums in your taxable income.

If you receive SSDI, whether your benefits are taxable depends mainly on your "combined income," which is your adjusted gross income (AGI), tax-exempt interest, plus half of your SSDI benefits.

For individuals with a combined income of $25,000 to $34,000, up to 50% of your benefits may be taxable; above $34,000, as much as 85% of your SSDI benefits could be taxable. 

For married couples, those thresholds increase to $32,000 for 50% taxation and above $44,000 for 85%.

Not every state taxes disability income the same way the federal government does. Some states do not tax Social Security benefits, while others have their own criteria for taxing SSDI or other disability income. 

For example, states like Florida and Texas do not have state income taxes, meaning disability income would not be taxed at the state level.

However, in 12 states, including Rhode Island and Vermont, SSDI benefits are taxed depending on your income level. Check your state's specific tax rules or consult a tax professional to understand your state tax obligations for disability benefits.

If you receive private disability insurance benefits, whether they're taxed may depend on who paid for the insurance premiums.

Your benefits are typically tax-free if you purchased the policy and paid the premiums with after-tax dollars. However, if your employer covered the premiums and you didn't report them as income, your disability benefits are likely taxable.

If some of your disability income is taxable, tax credits and deductions may help reduce your overall tax burden. 

For example, the Credit for the Elderly or the Disabled is available to individuals 65 or older or those on permanent and total disability who meet certain income limits.

Medical expenses above a certain threshold can also be deducted, which may also help reduce taxable income. For people receiving disability benefits, exploring available credits and deductions can lead to significant tax savings.

Whether your disability income is taxable depends on various factors, including income level, type of benefits, and even state tax rules. A tax professional can help you determine which taxes, if any, apply to your situation and help to eliminate some money stress.

Have you explored all available tax credits and deductions to reduce your tax liability on disability income?