Social Security Disability

[RMD28]

I recently went on Social Security Disability and received a lump sum payment of back payments beginning on the date I initiated my application. How much money should I set aside to cover the required 2024 tax payment?

[BettieG]

@RMD28 

Social security disability insurance benefits (SSDI) may be taxable if you receive income from other sources, such as investments, or if your spouse earns income, which places you above a certain threshold.  If you only receive the SSDI benefits, you will likely not have to pay federal income tax for the current year.  Please take a look at this TurboTax article:  Is Social Security Disability Income Taxable?

It’s not unusual to receive a back payment after your SSDI application gets approved by the Social Security Administration, to cover the time your application was pending.  Depending on your income, you may not owe any taxes at all, either on your SSDI monthly payment or the lump sum payment.  For example, if you are filing Single and have less than $25,000 in income for the year (including half of the SSDI payment and back pay), you won’t owe any taxes on your SSDI.

The IRS has a very easy-to-use interactive tool that will help you determine whether any of your SSDI benefits are taxable in a particular year.  Click on this IRS Interactive Tax Assistant tool, and progress through the questions.  If you enter your information for each of the years, you will be able to determine whether any of your benefits are taxable.

Should you determine that your income is above the threshold and that you have taxable SSDI back pay, you must include the taxable part of the lump-sum benefits in the current year, even if it pertained to an earlier year, rather than by amending your prior year tax returns.  If this is the case, there are two ways to determine the amount to include in the current year:

1. Use your current year’s income to determine the taxable part of the total benefits received in the current year; or
2. Make an election to calculate the taxable part of the lump-sum payment for an earlier year separately, using your income from that earlier year.

You can use the method which results in the least tax liability for you.  Please refer to IRS Publication 915 to help you calculate the taxable portion of your benefits.