Many people are unsure how to deal with disability income when it comes time to file their taxes. By following these steps, you will be able to determine how to handle your tax issues regarding your disability income.
Step One: Determine whether you owe tax on your disability income. There are several types of disability income that you can receive. The type of disability income and the amount of your total income from all sources will determine how you will pay income tax on that income. We will discuss the three main types of disability income.
First, we will discuss Federal Social Security Disability Benefits. These benefits are treated the same as ordinary retirement benefits and are subject to income tax. The only important exception, however, is that Social Security Supplemental Income (SSI) is not subject to income tax at all.
The amount of income tax owed on the disability income is determined by your total income. If you file your taxes individually, and your entire income is between $25,000-$34,000, or if you file jointly and your income exceeds $32,000, then 50% of your benefits are taxed. If your income exceeds $34,000 (filing individually) or $44,000 (filing jointly), then 85% of your benefits will be taxed. Any individual with less than $25,000 in income or anyone filing jointly with less than $34,000 in income will not owe income taxes on disability income.
Second, you may receive Disability Insurance Income. The question of whether you must pay taxes on disability insurance income is determined by looking at who pays the disability insurance premium. If your employer pays it, then you must pay taxes on the income. But if you pay the premium yourself, you will not pay taxes on the income received because those premiums have been paid with your after-tax dollars.
Step Two: Determine how much disability income you received. Each agency that provides your disability income will send you paperwork at the start of each year to let you know how much disability income you received from them. For example, if you receive federal social security disability benefits, will receive a form SSA-1099 in the mail each year, which will lay out the amount of social security disability income received in the prior year. Keep these records to help you prepare your income tax returns.
Step Three: File your income tax returns accurately and at the appropriate time.Federal income tax on disability income is due at the April 15th deadline along with the other income taxes that you must pay. All of these taxes are submitted along with your U.S. Income Tax Return, Form 1040. The Form 1040 instructions will help walk you through the tax return to determine the exact amount of income taxes owed. If you are uncomfortable filling out the tax return on your own, you can use an online tax return service that provides online help (such as TurboTax), a tax preparation service (such as Jackson Hewitt), or a tax preparation expert such as an accountant or CPA.
