Lump Sum Social Security Disability Payment - Is It Taxable?

Knowing the Rules May Save You Money

Couple receiving tax advice.
John Cowie/E+/Getty Images

According to statistics provided by the Social Security Administration, nearly 9 million disabled workers received income benefits through the Social Security Disability Insurance (SSDI) program in 2015. That number includes more than 775,000 people who became SSDI beneficiaries in 2015.

Applying for Social Security Disability benefits and waiting for a judgment can be a long process, sometimes taking months or years.

Many people who are awarded SSDI benefits receive a lump-sum payment to cover back payment for the months between their official date of disability onset and when they were finally awarded benefits.

According to Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center, people receiving the one-time, lump-sum back payments are often confused by how it should be handled on their Income Tax Return. Gada said, "The average monthly SSDI benefit for 2015 was $1,165 per month. As a result, many people relying on SSDI will not owe taxes. A problem can occur, however, if they mistakenly report all of a lump-sum payment received in 2015 as 2015 income, in which case they could end up paying too much in taxes."

Gada continued, "Up to 50% of Social Security Disability benefits are taxable each year. The actual amount is determined by adding one-half of the taxpayer’s SSDI benefits to all of his or her other income sources.

A federal income tax return must be filed if gross income is over a certain amount per IRS rules."

It's essential to know the right way to treat lump-sum payments. The IRS allows taxes on SSDI lump-sum payments to be spread over previous tax years using the current-year tax return, according to Gada.

That means you won't have to file amended returns, or pay higher taxes on your current year’s income.

If you received a lump-sum SSDI payment in 2015, you will see the amount included in Box 3 of the Form SSA-1099 received from the Social Security Administration. Worksheets provided in IRS Publication 915 can be used to determine the taxable portion of a retroactive SSDI payment. But, according to Gada, it's difficult to do by hand. He recommends using a knowledgeable tax professional or purchasing tax preparation software that covers this aspect of tax preparation.

More Tax Tips and Free Tax Filing Help From Allsup

Allsup highlights additional tips that may help people with disabilities and their caregivers save on their taxes:

Tax Credits

  • Earned Income Tax Credit
  • Credit for people with disabilities
  • Dependent care credit

Tax Deductions

  • Increased standard tax deduction for people who are blind or visually impaired
  • Medical deductions for taxpayers who can itemize and deduct medical costs
  • Deduct the costs of seeking SSDI benefits (for taxpayers who hired a representative such as Allsup to help them get SSDI benefits and who itemize)

    For more information on Social Security disability benefits, please contact the Allsup Disability Evaluation Center at (800) 678-3276 and check out their free online resource, Managing Your Taxes.

    Continue Reading