Applying for SSDI benefits and waiting for a judgment can be a long process, sometimes taking months or years. It generally takes 3-5 months. Many people who are awarded SSDI benefits receive a lump-sum payment to cover back pay for the months between their official date of disability onset and when they were finally awarded benefits. Some of that big check, however, may be going back to Uncle Sam as taxes. Income tax is not automatically withheld, so you do not want a nasty surprise a few months down the road.
Half of Your SSDI Benefits Are Taxable Each Year
Many people who rely on monthly social security disability payment as their sole source of income won’t owe taxes. However, reporting the lump sum as income for one tax year can result in owing taxes. You could end up paying more than you need to pay if you don’t get the right advice.
If you make between $25,000 and $34,000 each year, you may have to pay income tax on up t0 50% of your benefits, and if you made more than $34,000, you could owe taxes on up to 85% of your benefits. A federal income tax return must be filed if gross income is over a certain amount per IRS rules," Gada says. Whether you owe tax due to the lump sum payment will depend on how much you receive and how much income you had during the tax years the payment covered.
Use IRS Publication 915 Worksheets to Figure Your Tax
It may be to your advantage to claim all of the lump sum in the current tax year or to use the IRS worksheets to spread it over previous tax years. If you choose to spread it over previous tax year, you won’t need to amend the tax returns from those years. You can figure out which is to your advantage using a worksheet filed with your current tax return. You will pay the lesser amount as determined by the worksheet.
If you received a lump-sum SSDI payment, you will see the amount included in Box 3 of the Form SSA-1099 received from the Social Security Administration.
Worksheets provided in IRS Publication 915 can be used to determine the taxable portion of a retroactive SSDI payment.
These calculations are best handled with tax preparation software or by using a tax professional to prepare your return.
