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Social Security Disability Lump Sum - Is It Taxable?

Knowing the Rules May Save You Money


Updated June 02, 2014

According to statistics provided to us by Allsup (a nationwide provider of Social Security Disability Insurance representation and Medicare plan selection services), about 8.6 million disabled workers received income benefits through the Social Security Disability Insurance (SSDI) program in 2011. That number includes more than 1 million people who became SSDI beneficiaries in 2011.

Applying for Social Security Disability benefits and waiting for a judgment can be a long process, sometimes taking months or years. Many people who are awarded SSDI benefits receive a lump-sum payment to cover back payment for the months between their official date of disability onset and when they were finally awarded benefits.

According to Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center, people receiving the one-time, lump-sum back payments are often confused by how it should be handled on their Income Tax Return. Gada said, "The average monthly SSDI benefit for 2011 was $1,072.96 or $12,875.54 for the year. As a result, many people relying on SSDI will not owe taxes. A problem can occur, however, if they mistakenly report all of a lump-sum payment received in 2011 as 2011 income, in which case they could end up paying too much in taxes."

Gada continued, "Up to 50% of Social Security Disability benefits are taxable each year. The actual amount is determined by adding one-half of the taxpayer’s SSDI benefits to all of his or her other income sources. For 2011, a federal income tax return must be filed if gross income is at least $19,000 for couples filing jointly and $9,550 for individuals."

It's essential to know the right way to treat lump-sum payments. The IRS allows taxes on SSDI lump-sum payments to be spread over previous tax years using the current-year tax return, according to Gada. That means you won't have to file amended returns, or pay higher taxes on your current year’s income.

If you received a lump-sum SSDI payment in 2011, 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. But, according to Gada, it's difficult to do by hand. He recommends using a knowledgeable tax professional or purchasing tax preparation software that covers this aspect of tax preparation.

More Tax Tips and Free Tax Filing Help From Allsup

Allsup highlights additional tips that may help people with disabilities and their caregivers save on their taxes:

Tax Credits

Earned Income Tax Credit - This is a refundable tax credit of up to $5,751. When it’s applied, it could result in a refund. To be eligible, a taxpayer or a spouse needs to have been employed for part of 2011, earned below $13,660 to $49,078 (depending upon filing status and the number of children claimed) and had investment income of $3,500 or less. Many people with disabilities don’t file a tax return because their income is so low but you could lose out on thousands of dollars from the EITC if you don’t file a tax return.

Credit for people with disabilities - Taxpayers are eligible for this credit of up to $7,500 if they receive taxable disability income from a former employer’s accident, health or pension plan and meet income requirements. For 2011, adjusted gross income (AGI) must be under $17,500 for single filers, under $20,000 for joint filers with one spouse eligible for the credit, or under $25,000 for joint filers with both spouses eligible.

Dependent care credit - Taxpayers who pay someone to care for a dependent or spouse with physical or mental impairments may be able to take a credit of up to 35 percent of day care costs while they are working or looking for work.

Tax Deductions

Increased standard tax deduction - People who are blind or visually impaired may be able to take a higher standard tax deduction.

Medical deductions - Taxpayers who itemize can deduct medical costs if those costs exceed 7.5 percent of their AGI. Deductible expenses include medical and dental costs, travel expenses for treatment, long-term care and medical insurance premiums, and costs for certain equipment for people with disabilities. Taxpayers with a chronic illness, or with a spouse or child with a chronic illness, may be able to deduct costs for attending conferences related to that illness.

Deduct the costs of seeking SSDI benefits - Taxpayers who hired a representative such as Allsup to help them get SSDI benefits and who itemize can deduct the representation fee paid from the taxable part of their benefits.

For more information on Social Security disability benefits, please contact the Allsup Disability Evaluation Center at (800) 678-3276 and check out their free online resource, Managing Your Taxes.

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