02 Mar Do I have to pay taxes on my disability income?

Q. I’ve been collecting disability for about five years and I received a 1099. Am I supposed to be paying taxes each year on my disability income? I never have and do not have taxes withheld from my checks.
— Concerned

A. It’s unusual why you just received your first 1099 now.

But do you owe taxes? It depends.

How you get taxed on disability benefits is determined by the type of coverage you have and how the insurance premium gets paid, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

If you are receiving benefits from a group disability policy you have through your employer and your employer pays the premium for you as an employee benefit, then any benefits received are taxable to you as income, he said. If the disability insurance premium was deducted from your paycheck, then the benefits received are tax-free.

Then consider what happens if you are receiving benefits from an individual disability policy you purchased on your own.

“If you paid the premium with after-tax dollars, then the benefits you receive are tax-free,” he said. “If you own a business or are self-employed and took the deduction for your premium against your income — used pre-tax dollars or paid it through your company — then the benefits are taxable as income to you.”

If you are receiving Social Security disability, it’s more complicated, DeFelice said.

He notes that the IRS says that Social Security disability benefits may be taxable if one-half of your benefits, plus all your other income, is greater than a certain amount which is based on your tax filing status.

“Even if you’re not working at all because of a disability, you’d still have to count any unearned income such as tax-exempt interest and dividends,” he said. “And if you’re married and file a joint return, you also have to include your spouse’s income in this calculation, even if your spouse isn’t receiving any benefits from Social Security.”

The IRS sets the threshold for taxing Social Security disability benefits at the following limits:
· $25,000 if you’re single, head of household, or qualifying widow(er),
· $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
· $32,000 if you’re married filing jointly,
· $0 if you’re married filing separately and lived with your spouse at any time during the tax year.

DeFelice said this means that if you’re married and file a joint return, you can report a combined income of up to $32,000 before you’d have to pay taxes on Social Security disability benefits.

There are two different tax rates the IRS can apply, based on how much income you report and your filing status, he said.

If you’re single and file an individual return, you’d pay taxes on:
· Up to 50% of your benefits if your income is between $25,000 and $34,000
· Up to 85% of your benefits if your income is more than $34,000

If you’re married and file a joint return, you’d pay taxes on:
· Up to 50% of your benefits if your combined income is between $32,000 and $44,000
· Up to 85% of your benefits if your combined income is more than $44,000

“In other words, the more income you have individually or as a married couple, the more likely you are to have to pay taxes on Social Security disability benefits,” DeFelice said. “In terms of the actual tax rate that’s applied to these benefits, the IRS uses your marginal tax rate – so you’d pay your ordinary income tax rate based on whatever tax bracket you land in.”

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This story was originally published on March 2, 2021.

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