If you receive benefits through Social Security Disability Insurance, you may need to pay taxes on them. In some states, Social Security benefits are taxable, while in most states they are not. In some situations, the federal government also applies taxes to your benefits. If you do have to pay taxes on these benefits, it is essential to plan ahead to do so. Otherwise, you could pay a significant tax bill at the end of the year. Here’s what to know.
Full Tax on Social Security Benefits
A few states apply full tax on Social Security benefits. That is, you pay your state’s income tax rate on the disability benefits you receive. This happens in Montana, New Mexico, and Utah. In Utah, some residents may qualify for tax credits. This is dependent on your filing status, age and income. In New Mexico, there is a small exemption for some individuals who are over the age of 5 or those who have a low income.
Taxes Based on Adjusted Gross Income
In several other states, you pay taxes based on your adjusted gross income (AGI). For example, in Connecticut, the state using AGI. However, some people making less than $50,000 are exempt from doing so. In Colorado, the state follows this method but allows those who are under 65 to exclude as much as $20,000 and those over 65 to exclude as much as $24,000 from taxable income. Those who receive benefits in Kansas do not pay taxes on them unless you have an AGI of over $75,000. And, in Missouri, you can expect to pay taxes at the state level if your AGI is over $85,000.
Other states do not tax Social Security benefits at the state level. There may be exceptions to this, such as instances in which you receive a large lump sum. Your taxable rate depends on the current tax rates in your state in all situations. These values can change over time.
Federal Rate Taxation
The states previously mentioned apply the state tax rate on your benefits. However, these states apply the federal tax rate at the state level. This includes Minnesota, Nebraska, North Dakota, Rhode Island, Vermont and West Virginia.
Federal Taxation on Social Security Benefits
At the federal level, most people do not have to pay taxes on their Social Security Disability benefits. Under federal laws, most people who would earn enough to pay taxes at this level would not qualify for Social Security Disability benefits.
However, individuals who have a significant household income may face this type of taxation. For example, individuals making over $34,000 on their own (and receiving benefits) could see as much as 85% of their benefits taxed at this level.
Another concern occurs when you receive a large lump sump payment. This can happen when an individual receives back payments or retroactive benefits after filing for Social Security benefits. In this situation, your tax rate may be higher for the year simply because of the large sum of money you receive.
Social Security disability has a variety of rules that can impact you. If your income is higher than the allowable amount per month, you can expect to pay taxes on it. Additionally, your benefits may be at risk if you earn more than the allowable amount over the course of the year.
At The Good Law Group, we represent individuals who wish to apply for benefits or need representation due to an appeal. Contact us for a complimentary case evaluation.