How are disability benefits taxed?

How are disability benefits taxed?

Disability income, also referred to as disability payments or benefits, is income provided to individuals unable to work due to a physical or mental disability. Disability income can come from various sources: the government, an employer, or an insurance policy. Understanding how these benefits are taxed can help you ascertain your financial situation come tax time — and ensure you get the most out of your benefits.


Is disability income taxable?


The IRS generally considers disability income taxable — you will need to report it on your tax return and pay taxes on it, just like any other income. To make filing your taxes as easy as possible, it is vital to keep accurate records of the amount you receive each year.


Are any forms of disability income not taxable?


While disability income is generally considered taxable, there are some exceptions to this rule; for example, if you received disability payments through a plan funded by pre-tax dollars, such as an employer-sponsored plan, those payments may not be taxable. In addition, if you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, those benefits are considered taxable income if your total income, including your benefits, exceeds a certain threshold. The threshold is different for each filing status and is based on the federal poverty guidelines. For example, if you are single and have a total income of $25,000 or more, you will have to pay taxes on some or all of your SSDI or SSI benefits.

In addition, veterans’ disability compensation is usually not taxable. The same is true for any benefits you receive under a workers’ compensation act or a public disability benefit. Additionally, taxpayers who incurred significant medical expenses during the tax year might be able to deduct those from their taxes if they exceed a certain percentage of their adjusted gross income. Remember that tax laws are subject to change and can vary depending on your jurisdiction. It is always a good idea to consult your local Liberty Tax pro to ensure that you are aware of all the tax benefits available to you — and that you are maximizing your benefits while minimizing your tax burden.

What tax benefits are available to individuals with disabilities?

Several benefits are available to individuals with disabilities, including:

Certain disability tax credits help offset disability-related costs, such as medical bills or assistive devices. To claim these credits, you must have a signed certification from a qualified medical practitioner stating that you have a severe and prolonged impairment in physical or mental functions.

The Working Income Tax Benefit contains a disability supplement. To be eligible for this supplement, you must have a valid disability tax credit certificate and meet other specific criteria.

The Credit for the Elderly or Disabled applies to taxpayers who were permanently disabled when they retired, as long as their adjusted gross income (AGI) does not exceed $17,500 per year.

Benefits of filing taxes OR Why should I file taxes?

Benefits of filing taxes OR Why should I file taxes?

Benefits of Filing a Tax Return

Get your money back. In some cases, you may get your money back when you file your tax return. For example, if your employer withheld taxes from your paycheck, you may be owed a refund when you file your taxes.

Avoid interest and penalties. You may avoid interest and penalties by filing an accurate tax return on time and paying any tax you owe in the right way before the deadline. Even if you can’t pay, you should file on time or request an extension to avoid owing more money.

Protect your credit. You may avoid having a lien placed against you when you file an accurate tax return on time and pay any tax you owe in the right way before the deadline. Liens can damage your credit score and make it harder for you to get a loan.

Apply for financial aid. An accurate tax return can make it easier to apply for help with education expenses.

Build your Social Security benefit. Claiming your self-employment income on your return ensures that it will be included in your benefit calculation.

Get an accurate picture of your income. When you apply for a loan, lenders will look at your tax return to figure out your interest rate and decide if you can repay. If you file accurate tax returns, you may get a loan with a lower interest rate and better repayment terms.

Get peace of mind. When you file an accurate tax return and pay your taxes on time, you’ll know that you’re doing the right thing to follow the law.




What to Bring to a Tax Appointment (Tax Checklist)

What to Bring to a Tax Appointment (Tax Checklist)

Personal documents

Bring all documents below.

Photo ID

Social Security Cards, Social Security Number verification letters, or Individual Taxpayer Identification Number assignment letters for you, your spouse, and any dependents

Birth dates for you, your spouse, and dependents on the tax return

Bank account and routing number or a voided check for direct deposit of your refund

2020 and 2021 tax return, if you have them

Identity Protection PIN (IP PIN), if you have one


Bring all documents that apply.

Employment Income

W-2 form(s) for all jobs last year (your employer(s) will have sent you this by January 31st)

Self-Employment Income

1099-NEC and/or 1099-K

Records of income not reported on 1099 forms

Records of expenses including receipts, credit statements, etc.

Record of estimated tax payments

Retirement or Disability Benefits

SSA-1099 form for Social Security benefits

1099-R for pension/IRA/annuity income

Unemployment Income

1099-G for unemployment benefits

Other sources of income

1099-G for refund of state/local income taxes

1098-T for scholarships/fellowships

Income or loss from the sale of stocks, bonds, or real estate

Income or loss from rental property

Alimony received

Statements for prizes or lottery/gambling winnings

1099-INT/1099-DIV for Interest and dividend statements from banks

Records for any other income


You may be able to claim tax deductions for some of the expenses you have. These deductions reduce the income you are taxed on. Bring documentation for all of the following expenses you have.

Retirement contributions, including a 401(k) or IRA

State and local taxes you’ve paid

Mortgage statements and property tax bills if you are a homeowner

College tuition (Form 1098-T) and student loan statements (Form 1098-E)

Childcare expenses, including payment records or receipts and provider’s name, address, and federal tax ID number (either their Social Security Number or Employment Identification Number)

Receipts for charitable donations

Medical and dental bills

Records for supplies used as an educator