Do I Have To Pay Taxes On My Disability Income
Q. Ive 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. Its 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, its more complicated, DeFelice said.
The IRS sets the threshold for taxing Social Security disability benefits at the following limits:
So I Have To File A Tax Return If I Am Above The $25000 Or The $32000
Not always. Now we have to see if you are above the filing thresholds. For tax year 2021, the amount of taxable income you have to be above, and therefore be required to file, is:
- Single filing status:
- $12,400 if under age 65
- $14,050 if age 65 or older
Are Long Term Disability Benefits Taxable
In 2015, the CRA updated its disability benefit tax withholding requirements. The changes impacted the method of calculating taxable disability benefits for both STD and LTD plans.
Traditionally, STD and LTD benefits would be taxed when you file your annual income tax returns. This meant income tax was not deducted during issuance of STD or LTD payments. From January 2015, CRA requirements are now that STD and LTD payments have to be taxed at the time the payments are issued.
STD and LTD Wage Loss Replacement Plans , which insures employees against loss of employment income following disability, accidents, or sickness, are generally subject to tax when the employer is the one making contributions and are to be reported on line 104 of your T1.
On the other hand, STD and LTD plans that fall under income-replacement benefits, which are payments made to persons who are unable to work as a result of auto accidents, are normally not taxed. Income replacement benefits are offered as part of SABs , which are a requirement in Ontario with all auto insurance.
Employee-Paid Premiums
If the employee is making the full premium payments for his/her STD or LTD plan, they are not taxed. When you are paying your own LTD insurance premiums, you are using after-tax dollars. This means you do not get to reduce your income tax to cater for the premiums you have paid for disability insurance.
Employer-Paid Premiums
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Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January, detailing the benefits you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security site.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
How Social Security Works
The Social Security Administration provides much-needed benefits for tens of millions of American citizens. For many people, Social Security is the sole or main source of financial support. In 2020, the average Social Security retirement pension beneficiary receives $1,514 a month, while the average disability payment recipient gets $1,259 a month. Millions of Americans also get survivor benefits through the SSA as a result of their qualifying dependent relationship with a current or former Social Security beneficiary.
Social Security benefits from all sources are generally paid on a monthly basis, with either direct deposit or paper checks delivered to all recipients in the country. Unlike some government benefits, such as SNAP, Social Security benefits are not earmarked for any particular purpose, but may be saved, invested and spent like any other form of income.
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Retirement Information Ira Topics Pension Exclusions Social Security Benefits
Q. Im planning to move to Delaware within the next year. I am retired. I am receiving a pension and also withdrawing income from a 401K. My spouse receives social security. What personal income taxes will I be required to pay as a resident of Delaware? I also would like information on real estate property taxes.
A. As a resident of Delaware, the amount of your pension and 401K income that is taxable for federal purposes is also taxable in Delaware. However, persons 60 years of age or older are entitled to a pension exclusion of up to $12,500 or the amount of the pension and eligible retirement income . Eligible retirement income includes dividends, interest, capital gains, net rental income from real property and qualified retirement plans , such as IRA, 401 , and Keough plans, and government deferred compensation plans . The combined total of pension and eligible retirement income may not exceed $12,500 per person age 60 or over. If you are under age 60 and receiving a pension, the exclusion amount is limited to $2,000.
Social Security and Railroad Retirement benefits are not taxable in Delaware and should not be included in taxable income.
Also, Delaware has a graduated tax rate ranging from 2.2% to 5.55% for income under $60,000, and 6.60% for income of $60,000 or over.
For information regarding property taxes you may contact the Property Tax office for the county you plan to live in.
You Don’t Have To Report Ssi Income To The Irs
The Internal Revenue Service taxes virtually all sources of income. Chapter 26 of U.S. Code Section 61 defines gross taxable income as “all income from whatever source derived,” and that covers a whole lot of ground. The Code cites several sources of income as examples, but Supplemental Security Income doesn’t appear anywhere on the list. That means SSI is not taxable.
Some confusion arises, however, because the Social Security Administrationnot the IRSdoes require income reporting for purposes of qualifying for SSI. Here’s how income affects SSI.
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How Federal Taxes On Social Security Are Calculated
Once you start collecting Social Security benefits, you’ll get a Social Security benefits statement in the mail each year in January showing the total amount of benefits you received in the previous year. To figure out how much, if any, of the total amount may be taxed, the first thing you need to do is calculate your “provisional income.” Your provisional income is generally equal to the combined total of 50% of your Social Security benefits, your tax-exempt interest, and the other non-Social Security items that make up your adjusted gross income .
For single people, your Social Security benefits aren’t taxed if your provisional income is less than $25,000. The threshold is $32,000 if you’re married and filing a joint return. If your provisional income is between $25,000 and $34,000 for a single filer, or from $32,000 to $44,000 for a joint filer, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return, or $44,000 on a joint return, up to 85% of your benefits may be taxable.
The IRS has a handy calculator that can help you determine whether any of your Social Security benefits are taxable and, if so, how much. Once you know how much is taxable, that amount is included on Line 6b of Form 1040 and becomes part of your taxable income. That income is then taxed with other income according to your tax bracket.
Does Social Security Income Count As Income
Yes, but you can minimize the amount you owe each year by making wise moves before and after you retire. Consider investing some of your retirement savings in a Roth account to shield your withdrawals from income tax. Take out some retirement money after youre 59½, but before you retire to pay for expected taxes on your Social Security before you begin receiving benefit payments. You might also talk to a financial planner about a retirement annuity.
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Income Taxes And Your Social Security Benefit
Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits .
You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service rules. If you:
- file a federal tax return as an “individual” and your combined income* is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
When Is Social Security Disability Taxable
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 youre not working at all because of a disability, other income youd have to report includes unearned income such as tax-exempt interest and dividends.
If youre married and file a joint return, you also have to include your spouses income to determine whether any part of your Social Security disability benefits are taxable. This is true even if your spouse isnt receiving any benefits from Social Security.
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Keep Some Retirement Income In Roth Accounts
Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means theyre not subject to taxation when the funds are withdrawn. So the distributions from your Roth IRA are tax-free, provided their taken after you turn 59 1/2 and have had the account for five or more years. Distributions taken from a traditional IRA or 401 plan, on the other hand, are taxable.
That means the Roth payout wont affect your taxable income calculation. That also means it wont increase the tax you owe on your Social Security benefits.
This advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits.
A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
State Taxation Of Social Security Benefits
Most states don’t tax Social Security benefits. But the ones that do either follow the same federal provisional income rules or have special rules and income thresholds to determine what’s taxable.
These 4 states use the federal PI formula: Minnesota, North Dakota, Vermont, and West Virginia. The taxable portion of Social Security for these states is the same as the federal amount.
Nine states have special rules and income thresholds. Most use the federal modified adjusted gross income formula rather than the federal PI formula for taxing Social Security income.
These states are: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, and Utah.
If you live in a state that counts Social Security benefits as taxable income, you should consult your state tax department for details and a qualified tax advisor.
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If My Only Income Was Social Security Benefits Can I Claim The Child Tax Credit
It depends. If your benefits are taxable, then you can claim the child tax credit.
According to the Social Security Administration, you pay 85% of your Social Security benefits if you:
- file a federal tax return as an individual and your combined income* is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
The child tax credit will reduce the tax owed, so it needs some taxable income from Social Security to be applied to. The additional child tax credit can only be claimed on earned income, so you need to make money outside of Social Security benefits.
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Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement age. Take a chunk of money out of your retirement account and pay the taxes on it. Then, you can use it later without pushing up your taxable income.
This means you could withdraw funds a little earlyor take distributions, in tax jargonfrom your tax-sheltered retirement accounts, such as IRAs and 401s. You can make penalty-free distributions after age 59½. This means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less tax by making more withdrawals during this preSocial Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and other sources. Be mindful, too, that at age 72, youre required to take RMDs from these accounts, so you need to plan for those mandatory withdrawals.
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Why Should You File
A major reason to file for SSI beneficiaries is to recover tax credits, such as the Earned Income Credit for those who work or the Child Tax Credit for individuals with qualifying children.
Another reason to file a tax return is to recover Economic Impact Payments, popularly known as “stimulus payments,” from either 2020 or 2021. The CARES Act of 2020 included a provision for the distribution of direct cash payments to qualifying American citizens. If an otherwise qualified individual did not receive the Economic Impact Payments they were due, the payments can be recovered as a tax refund by filing a tax return for the year in question, even if there is no income on the return.
Filing taxes can also help avoid fraudulent returns from being filed using a specific Social Security Number. Filing a return, even if it is not required, will ensure that nobody else can file using your Social Security Number.
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What If You Are A Canadian Resident Who Receives Us Social Security Benefits
We recently published an article about US residents who receive CPP/OAS Canadian pension benefits. What about the opposite?
Lets take the case of our reverse snowbird Emily, a Canadian citizen who has been living and working in the US for the last 30 years and has fully qualified for US social security benefits. Instead of retiring in sunny Florida like a lot of Canadians choose to do, Emily wants to retire back in the frozen tundra otherwise known as Edmonton.
Is Emily crazy to retire in Canada?
Yes, if the weather is the only factor you consider.
But from a tax perspective, the US-Canada tax treaty is actually very favorable to Emily when it comes to the taxation of her US social security benefits when she moves back to Canada.
How so? Well, to begin with, Emily will not have to pay any US tax on the US social security benefits she receives in Canada. In order words, Emily does not need to pay a US withholding tax or even US income tax on the social security income received.
But wait. What if Emily is a US citizen living in Canada? Luckily for Emily, even a US citizen is treated the same way as other residents of Canada when it comes to the taxation of US social security benefits.
Namely, the US social security benefits will be subject to tax only in Canada.
What this means is that Emily will include in her Canadian taxable income only 85% of the US social security benefits she receives. For those of you doing the math, the other 15% will be exempt from tax in Canada.
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