Is disability income taxable?
Disability benefits you receive from the Department of Veterans Affairs (VA) aren't taxable and don't need to be reported on your return. However, Military Disability Retirement pay could be taxable if reported on form 1099-R.
Generally, Social Security Disability Benefits (SSDI), are not taxable unless you have substantial additional income (more than $25,000 for an individual or $32,000 for married filers). A form SSA-1099 is issued in January to enter on the tax return... see info below.
Workers' compensation benefits are not normally considered taxable income on your federal or state return. There is an exception when you receive both workers’ compensation and Social Security (or Railroad Retirement) benefits and part of your workers' compensation reduces your Social Security, that part may be taxable.
Disability benefits for loss of income or earning capability resulting from injuries under a no-fault auto insurance policy aren't taxable either.
Disability paid by an insurance company for lost wages, loss of limb, loss of sight (etc.) may or may not be taxable, depending on circumstance:
- If the premiums were paid by your employer and were not included in your taxable income, the disability is taxable.
- If you paid the premiums out of your own pocket or with payroll deductions that came out of your after-tax income, the disability is not taxable.
- If you and your employer jointly paid the premiums, only the disability amount covered by your employer's payments are taxable.
If you retired due to a disability, the pension you receive through an employer-paid plan counts as wage income until you reach the minimum retirement age (the age at which you can receive a pension if not disabled). Once you reach that minimum retirement age, the pension is no longer reported as wage income but as pension income.
- Do I need to report my veteran disability payments?
- Can I deduct life or disability insurance premiums?
- Do I need to report workers compensation?
- Is my disability pension considered earned income?
TAX ON SOCIAL SECURITY
Up to 85% of your Social Security benefits can be taxable on your federal tax return. There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits. When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable.
What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit. (For 2017 that limit is $16,920 —for 2018 it will be $17,040—for 2019 it will be $17,640) After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare.
Social security, including SS Disability income (SSDI) only becomes taxable when added to sufficient other income. If you are otherwise required to file a tax return, you do need to enter it in Turbotax (TT). TT will determine the taxable portion.
Social security (including SSDI) becomes taxable when your income, including 1/2 your social security, reaches:
Married Filing Jointly(MFJ): $32,000
Single or head of household: $25,000
Married Filing Separately and lived with your spouse at any time during the tax year: $0
After TurboTax (TT) calculates the taxable portion of SS, it puts the total amount of SS on line 5a of form 1040 and the taxable amount on line 5b (lines 20a & 20b in 2017). TT also produces a worksheet to show how the taxable amount is calculated. Although most people pay tax on 85% of their SS. it can be less for lower income taxpayers. How much less depends on your other income and will show on the worksheet.
There is a special rule that says SS becomes taxable at zero ($0) other income when Filing as Married Filing Separately (MFS).
You might think that filing MFS will save you money, because you don't have to add her income to your return. That thinking is usually wrong. The doubled standard deduction will wipe out most of her income, on a joint return. But you will still get the use the lower joint filing rates.
Before making a decision to file as MFS, you should run test returns and compare. You can use this tool: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1
Social Security disability is not taxable income unless you have other taxable income to report in a return. it is rejecting because there is no taxable income to report and you do not have a filing requirement. if you are reporting this to receive your stimulus payment, you should receive it automatically without you having to file a return. You can also log into https://www.irs.gov/coronavirus/economic-impact-payments and select the get my payment option to review your stimulus payment status or update your bank information.
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