For most of these individuals, not only is there a significant change in their health or medical well-being, but there is also a substantially reduced income level
Belleville, Ill. (Vocus) February 20, 2008
More than 8.5 million working-age adults either rely on Social Security Disability Insurance (SSDI) benefits as a primary source of income or are awaiting a decision to receive their SSDI benefits. Along with the complexities of SSDI and managing their disability comes an added layer of complexity at tax time, according to Allsup (http://www.allsup.com), which represents tens of thousands of people in the SSDI process each year.
"For most of these individuals, not only is there a significant change in their health or medical well-being, but there is also a substantially reduced income level," said Paul Gada, a tax attorney and financial services product manager for Allsup. "This combination makes understanding and minimizing their tax obligations a crucial part of their financial well-being.
"Tax issues are more important than ever this year since even individuals that only receive minimal SSDI benefits and who may not generally owe taxes will need to file a return if they want to receive the one-time tax rebate," he added.
Below, Allsup answers common questions individuals with disabilities have about their income tax obligations.
- Are Social Security disability benefits taxable?
Yes. Both monthly SSDI benefits and lump-sum retroactive payments of SSDI benefits are subject to federal income tax. The state tax treatment of SSDI benefits varies, but most states do not tax SSDI benefits.
The federal tax rules applying to monthly benefits are fairly straightforward, but those related to lump-sum payments of SSDI benefits are complex.
-General SSDI benefits. As with all Social Security benefits, up to 50 percent of SSDI benefits are potentially subject to tax each year. To determine this, an individual adds up half his SSDI benefits plus all his other income sources, including taxable pensions, wages, interest, dividends, etc., as well as tax-exempt interest income. Married individuals filing jointly will have to pay taxes on a portion of their SSDI proceeds if their total exceeds a base amount, which for 2007 is $32,000. Most other filers will have to pay taxes on proceeds that exceed a base amount of $25,000.
However, as much as 85 percent of SSDI benefits can be taxed if the total of one-half of a person's benefits and all her other income for 2007 exceeded $34,000 as a single filer or $44,000 for those who are married filing jointly.
"The average monthly SSDI benefit in 2007 was slightly over $1,000. As a result, if this was your major source of income, it's likely you will not have to pay any taxes or will have a very low tax bill, particularly if you take advantage of available credits and deductions," said Gada.
-Lump-sum SSDI benefits. Trying to calculate the taxes owed on a lump-sum retroactive payment, which includes SSDI benefits owed for earlier years, gets far more complex.
"There are more than 1.4 million disability claims pending with the Social Security Administration, with the average time to receive an award taking two to four years," said Gada. "So, for example, if it takes 42 months to receive your award, you could receive a lump-sum payment of more than $40,000. That's a lot of income at once and could wreak havoc on your tax obligation."
Fortunately, there is a special election that allows lump-sum payments to be spread over previous tax years that represent the retroactive pay period, using just the current year tax return - with no need to file any amended returns. Unfortunately, the calculations required to figure this out manually over a multi-year scenario are extremely difficult. As a result, Gada encourages individuals to invest in tax preparation software or use a tax professional to prepare their taxes.
Individuals who received disability payments through an employer's or insurance company's long-term disability policy and had to repay the employer or insurance company for the disability payments can take an itemized deduction for all or part of the repayments.
- What credits and deductions are available to lower my tax bill?
Individuals with disabilities may be able to lower the taxes they owe through disability-related tax credits and deductions, as well as due to having reduced income. Among the tax breaks to evaluate are:
-Credit for the disabled. This credit is available if an individual receives taxable disability income and has 2007 adjusted gross income under: $17,500 for single filers; $20,000 if filing jointly and only one spouse is eligible for the credit; and $25,000 if filing jointly and both spouses are eligible.
-Representation cost. Individuals can deduct the expenses for SSDI representation required to secure their benefits.
-Dependent care credit. An individual who pays someone to care for his dependent or spouse who is not physically or mentally able to take care of herself may be able to receive a credit of up to 35 percent of the care provided while he was working or looking for work. The amount of the credit decreases as earnings go up, but a minimum credit of 20 percent is available to those with adjusted gross earnings over $43,000.
-Earned income tax credit (EITC). This is a refundable credit, which means that if the credit amount is higher than an individual's tax bill, she can actually get the unused portion of the credit back as part of a tax refund. To be eligible, a taxpayer or spouse had to have been employed for at least part of 2007, earned below a threshold of $12,590 to $39,783, depending upon filing status and the number of children claimed, and had maximum investment income of $2,900. Individuals qualifying for the EITC can realize a credit ranging from a few dollars to more than $4,700, depending on income and family size.
"In 2007, more than 22.4 million taxpayers received over $43.7 billion in earned income credits by filing their 2006 federal income tax returns," said Gada. "Unfortunately, the IRS estimates that approximately one in four eligible taxpayers failed to claim the EITC, mainly because they are unaware it exists. So, it's important to look at all available options."
-Saver's credit. For those struggling with the financial hardships caused by a permanent disability, putting away money for retirement may seem impossible. But individuals who qualify and can do so will realize a nice tax break as the maximum Saver's Credit is half of the first $2,000 ($4,000 for couples) saved in a retirement account, so up to $1,000 for a single filer and up to $2,000 for a married couple filing jointly. For 2007, the maximum income thresholds are $26,000 for single filers and $52,000 for couples filing jointly.
-Medical deductions. Those taxpayers itemizing their tax returns can deduct medical costs from their income tax so long as the expenses equal more than 7.5 percent of their adjusted gross income. This may be attainable for someone with a permanent disability who has little reportable income - if they understand all the expenses that can be included.
Deductible expenses include medical and dental costs for the taxpayer, their spouse and dependents, travel expenses to and from treatments, premiums for long-term care insurance payments, laser vision surgery, prosthetics, eyeglasses and hearing aids, costs for certain special equipment for the visually and hearing impaired, the cost and maintenance of a wheelchair and the cost and care of a guide dog for a person with a physical disability. Additionally, improvements to a home, such as constructing entrance ramps, can be deducted if their main purpose relates to medical care or accommodating a home for an individual's medical condition.
Additionally, individuals who are blind may be entitled to a higher standard deduction on their tax return.
- If all I received was SSDI benefits, am I eligible for the federal tax rebate program?
Generally, yes. But in order to receive a rebate, individuals must file a tax return - even if they owe no taxes. The one-time tax rebate, a part of the economic stimulus law President Bush signed earlier this month, is designed to stimulate the economy by having individuals go out and spend their rebate. Starting in May, the program will pay rebates to individuals with at least $3,000 in qualifying income, which includes income from a job, self-employment, Social Security benefits such as SSDI and veterans-disability payments. The rebate is $300 for qualifying single individuals receiving just Social Security or veterans-disability benefits and $600 for married couples.
However, the rebate amount could be more for a couple where one individual is also working (up to a $1,200 rebate) or where a single person with a disability had earned other income (up to a $600 rebate). Also, anyone getting a rebate may be eligible to get an extra $300 for each of their children under 17.
"Just because you have to file a tax return to get the rebate, it does not mean you'll have to pay any taxes. It just provides the IRS with the information it needs to issue your rebate, like your name, Social Security number, mailing address and 2007 income," explained Gada, noting that Allsup is providing a link to IRS tax forms needed for the rebate on its Web site for the convenience of individuals with disabilities.
Allsup is the nation's premier Social Security Disability Insurance representation company. Since 1984, Allsup has helped nearly 100,000 Americans with disabilities receive their entitled disability benefits. Today, the company has about 475 professionals focused on helping individuals and their family's nationwide gain the financial and health benefits they deserve. For more information, visit Allsup's Web site at http://www.allsup.com.
(800) 854-1418 ext 5760