About one-third of Social Security beneficiaries have to pay taxes on their benefits. Whether you have to pay taxes depends on the type of Social Security benefits you are receiving and your total income (see Monday’s discussion for the latter). Today we cover the types of benefits and their tax liability.
Supplemental Security Income (“SSI”) Benefits
SSI benefits are not taxable, so you will not have to include them when you file your tax return. SSI benefits are available for those suffering from a disability who earn a low income. Unlike Social Security Disability Insurance benefits, SSI is not based on work history.
Social Security Survivors Benefits
The Social Security Administration (“SSA”) pays these benefits to children and other family members of workers who pass away. Almost all children are eligible for these benefits in the event that their working parent dies. The benefits come from the years of work during which the parent paid into the Social Security system.
The tax consequences of survivors benefits depend on who receives the benefits. Survivors benefits do count as income, but only for the recipient, so, for example, a child’s survivors benefits go towards his or her tax return and not his or her parent’s return. As such, children would almost never have to pay taxes on their benefits, as they unlikely earn enough to make their benefits taxable. We discussed the calculation that children and other recipients of survivors benefits have to make in Monday’s post.
Lump Sum Social Security Disability Insurance (“SSDI”) Benefits
If an SSDI applicant has been trying to get benefits for years and then receives a favorable decision from the SSA, he or she will receive retroactive benefits for the time during which the applicant should have been receiving SSDI benefits. This larger-than-normal payment is a lump sum, and the Internal Revenue Service has special rules so that taxes do not take a big part of the lump sum in the year that the applicant received it.
Generally, you report the lump sum in the year that you got it, but you do not treat it all as income for that year. The SSA should break down how that lump sum should be treated for tax purposes on a form that the SSA provides you. We recommend consulting with a tax professional if you are concerned with the tax consequences of your lump sum disability payment.
Other Social Security Benefits
Other benefits generally count as income, and you should perform the calculations we discussed on Monday to determine whether you should pay taxes on your Social Security benefits.
Do you have any tax wisdom to share for others when it comes to Social Security benefits?
Troutman & Troutman, P.C. – Tulsa Social Security disability lawyers