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Do you have to pay taxes on SSD benefits?

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Social Security Disability benefits provide financial support to qualifying disabled people who can't work gainfully. As a form of income, these benefits can be taxed, as any Social Security lawyer in Tennessee would agree. However, not all beneficiaries are required to pay taxes on their benefits.

Taxation laws

Location and income determine whether a person's benefits are taxed at the state or federal level. Here in Tennessee, SSD benefits are exempt from taxation. Residents with lower overall income also may not have any federal tax liability.

The Internal Revenue Service bases tax liability on an adjusted income figure that includes general income and half of SSD benefits. Individuals with yearly income below $25,000 don't pay any taxes on their benefits. For married people who file jointly, the threshold is $32,000. People with higher income must pay taxes on part of their benefits.

Assessing liability

SSD beneficiaries never pay taxes on the full value of their benefits, as any Social Security lawyer in Tennessee could explain. Instead, a person's overall income determines the fraction of the benefits that are taxed at the person's marginal tax rate. The IRS establishes the following brackets:

  • Individuals with annual income between $25,000 and $34,000 pay taxes on 50 percent of their benefits.
  • Individuals whose yearly income exceeds $34,000 pay taxes on 85 percent of their benefits.
  • Married people who file jointly and have yearly income between $32,000 and $44,000 pay taxes on half of their benefits.
  • Married people with combined income over $44,000 pay taxes on 85 percent of their benefits.

People who owe taxes for SSD benefits can elect to have Social Security withhold the taxes, or they can personally make payments. People who choose the latter option must generally submit quarterly estimated tax payments to avoid penalties.

Other considerations

People who have recently qualified for SSD benefits may owe taxes on any lump sum payments they have received. Unfortunately, a large lump sum payment may change a beneficiary's liability or tax rate.

To avoid this issue, beneficiaries may be able to allocate part of their payments to prior tax years, as a Social Security lawyer in Tennessee understands. This is because a lump sum payment is a back payment of benefits that a person was eligible for during the SSD claim evaluation process. If part of a payment was accrued during a prior year, it can be reassigned to the appropriate tax return.

The IRS doesn't require beneficiaries to file amended returns for lump sum payments. Instead, beneficiaries can include their liability for benefits from prior years on their latest returns. Since calculating this liability can be difficult, consulting with a professional who understands SSD tax law is generally advisable.

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