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Social Security Disability Insurance and Your Taxes

August 10th

Payroll Taxes and the Application Process

disability tax creditThis year alone over three million people are expected to file for Social Security Disability Insurance (SSDI) claims. In June 2011 alone 287, 287 people filed for benefits. About 1.8 million SSDI claims are currently pending in the review process with an estimated average cumulative wait time of over 700 days. With figures such as these it is important to have a complete understanding of this process.

Though the Social Security Administration (SSA) is mandated by law to provide these crucial benefits to many Americans in need, the process of fulfilling their requirements can be painfully difficult.

There are four levels of review in the Social Security Administration’s (SSA) process. Chief among these is proving primary eligibility. SSDI benefits are based solely on how much a taxpayer has paid into the program through payroll taxes, or FICA, while working. SSDI benefits are not based on or affected by any other income or assets. This means that individuals must have paid payroll taxes for five of the last ten years in order to be considered eligible.

Taxation of SSDI Benefits

Once making it through the lengthy application process, many who receive Social Security Disability Insurance are not fully aware of how these benefits ought to be taxed. According to Allsup, an insurance company that offers assistance to many of those seeking SSDI benefits, startling number of recipients are actually overpaying their taxes every year.

It is therefore important for those with a disability and considering SSDI to have a full understanding of how these benefits are taxed. While SSDI benefits are still taxed by the federal government, there are a number of differences between the taxation of these and other kinds of income.

Up to half of SSDI benefits are taxable. However, there are a large number of tax credits and deductions that can help those who receive SSDI benefits to save money. Among these, some credits are even refundable, so taxpayers can get money back even if they owe nothing.

To calculate the tax on SSDI benefits, add any income from other sources to half of the total benefits for the year. If that total amounts to more than $25,000 (or $32,000 for couples who file jointly), federal taxes are most likely owed. Most SSDI beneficiaries do not end up owing anything in taxes.

This does not, however, mean that recipients who owe nothing should not file a tax return. Since there are so many possible tax credits and deductions, it is a good idea to file regardless.


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