Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
Every good accountant will answer questions like this by starting with two words: “It depends”.
If your disability income is only coming from social security, then none of the income is taxable and you do not need to file a tax return. Conversely, some disability income is reported on Form 1099-R. In this scenario, the income is taxable, and it is reported as if it were W-2 wage income until the disabled individual reaches retirement age. With the many complicated rules and exceptions to the rule in the tax code, it is important to make sure you know how to report any disability income that you receive.
Here is a breakdown of some common forms of disability income:
- Social Security disability income (or SSDI) This is generally reported on Form SSA-1099, and it’s based on work history like normal social security income. It’s reportable on your tax return if you need to file. However, if this is your only income, none of the social security income will be taxable and you don’t need to file your return.
- Since the disability determination from social security can take many years, the disability pay is often received as a lump sum for multiple years in one single year. There are two options for calculating the taxable portion of lump sum benefits.
- Using the standard taxable social security income calculation based on current year income, or
- Calculating the taxable portion based on the income for each year included in the lump-sum benefit payment
- Supplemental Social Security income (or SSI) This income is needs based on the severity of the disability along with the income and assets of the recipient. This income is typically not reported on Form SSA-1099, and it’s not reported on a tax return.
- Other types of disability from Social Security programs There are disability payments for children of disabled or deceased parents, additional benefits for surviving spouses who are disabled, and disabled adult child benefits. In these cases, the Social Security Administration will issue Form SSA-1099 to report the income.
- Veterans’ disability pay This income is not taxable, and it will not be reported to the IRS on an informational form like a 1099. If the disability rating changes retroactively for prior years making formerly taxable military pension into nontaxable veteran’s disability payments, the disabled veteran can amend the prior year return(s) to claim a refund on tax paid for income that is now nontaxable because of the new disability rating.
NOTE: Military pension income reported on a 1099-R is fully taxable and is related to years of service. This income should not include any amount related to veteran’s disability.
- Disability retirement pay from retirement plans and pensions This income is reported on Form 1099-R and it’s reported as wages until the disabled taxpayer reaches the minimum retirement age. After reaching retirement age, the payments are taxed as regular retirement income.
If you’re unsure about your disability income, feel free to ask questions here in the community, contact the payer, and utilize Pro Support while working on your return.