Most applications for Social Security Disability benefits are not immediately approved, and applicants may wait for two years for a final decision.
Even after approval, the backlog of cases in nearly every local Social Security Administration office means that some recipients don’t receive their first payments until months or even a year after approval.
The upside to this unfortunate reality is that Social Security Disability benefits include back pay for most or all of that time spent waiting, in the form of a single lump sum. This sum can be substantial, depending on the amount of benefits approved.
Individuals who have received ‘lump sum payments’ in other situations have been dismayed to learn that their payments were taxed at a higher rate than they expected, or threw off their ‘Annual Income’ for the year and raised their tax bracket.
This may make the prospect of receiving a similar lump sum from the Social Security Administration a bit more stressful than it would be otherwise.
Is Social Security Disability back pay taxable?
The IRS does not penalize individuals receiving Social Security Disability benefits for receiving their past-due benefit amounts all at once, but you may still end up paying some taxes on a small portion of your lump sum Social Security Disability payment, depending on your overall income for the year.
Federal law states that individuals can apportion their past-due benefits to previous years. This can help lower or even do away with the taxable amount of the lump sum per year.
Each year that an individual is receiving SSD benefits, they will receive a tax form labeled SSA-1099. For those who may be receiving this form for the first time, look to Box 3 for the exact amount of the lump sum accrued during previous years.
The lump sum amount is broken down on the form into the exact total paid for each separate year, one at a time.
Since the IRS provides the option of handling it all on your current tax return, using your prior years’ income amounts, there is no need to attempt to amend any previous year’s tax return. You can learn a little bit more about how to handle SSD benefit back pay taxes here.
Since Supplemental Security Income, or SSI, provides back-pay in three small installments made six months apart, the ‘taxable lump sum’ issue is less of a problem for those individuals.
While it is possible to calculate the amount of the lump sum that may be taxable on your own, the formula can be complex and difficult, so it may be worth the time to contact a tax professional that has experience with Social Security Disability back pay.
If the disability benefits you are receiving from Social Security are your only source of income, you will almost certainly not owe any federal income tax. On the other hand, if you’re married, filing jointly, or filing as an individual with income of $25,000 to $34,000, up to half of your Social Security Disability benefits may be considered taxable income.
If an individual receiving SSD benefits has an income over $34,000, or a married couple has a combined income of $44,000, 85% of the Social Security benefits may be considered taxable income.
Keep in mind that this does not mean that your tax rate on these amounts is 50% or 85%, just that up to 85% of your disability benefit amount will be added to your overall income for the year to determine what you owe in income tax, taxed at your usual marginal rate (for most, between 10% and 28%).
South Carolina joins 36 other states in the USA that make it a point not to tax Social Security Disability benefits at the state level.
If you move out of the state of South Carolina while receiving Social Security Disability benefits or before you receive your lump sum back payment, you’ll want to check and see whether or not your new residence is one of the thirteen states that does tax at least some portion of Social Security Disability benefits.
Should some of your lump sum turn out to be taxable, you may choose to deduct the fee paid to your attorney from your disability benefit income, on what is called a “pro rata” basis.
Here’s an example: If 30% of your SSD lump sum payment is taxable income, you may choose to deduct 30% of the fee paid to your attorney. This deduction is listed on Schedule A of your return, under “miscellaneous deductions”. You must file an itemized return to claim this deduction.
At Bluestein Attorneys, our Social Security Disability attorney Stacy Thompson is dedicated to helping sick, injured, and disabled South Carolinians receive the SSD and SSI benefits that help them make ends meet during tough times.
To request your FREE Social Security Disability consultation, give us a call at (803) 674-8818 or contact us online at any time.