How Does Disability Affect My Taxes?


When people receive disability benefits, this question naturally comes up. People who are facing a disability may be making less than they have in the past, or they may be receiving more income than they did before. That can often be true in situations where someone receives a lump-sum disability payment.

Disability can directly affect your taxes, but the tax consequences will depend on where any disability payments or benefits come from and where they go. Here are some common sources of disability benefits and how they could impact your taxes.

Taxation Depends on the Type Disability Benefits

We all understand that taxes are complicated. But that’s doubly true when it comes to your disability benefits. Let’s take a look at some of the common places that benefits could come from and how they could affect your taxes:

Supplemental Security Income (SSI). SSI is an important disability income program that is run via the Social Security Administration for people who have low income. It can provide essential income that helps people pay their bills and cover their expenses. Thankfully, according to the IRS, SSI benefits aren’t taxed. That can help simplify taxes for people facing disabilities.

Social Security Disability Insurance (SSDI). The Social Security Administration also runs the SSDI program. This program provides income to workers who have already paid into the Social Security system and then become disabled. Unlike SSI, SSDI benefits are taxable. However, one-half of your benefits plus any other income you receive must exceed the taxable threshold before they are taxed.

SSDI could also provide back pay that could significantly affect your taxes. Under SSDI rules, you may be able to receive a lump-sum payment for benefits that you are owed. This could increase the amount you owe for taxes in the current year. Thankfully, however, you may be able to figure out how much of your back pay may apply to tax returns from prior years.

Since many people receiving SSDI aren’t able to work and earn income, they often don’t exceed the taxable threshold. To explain more about disability benefits and what thresholds could affect your taxes, the IRS has put together frequently asked questions on the topic.

New York State and Local Retirement System (NYSLRS). The state of New York runs this program for its employees. If you receive disability benefits through NYSLRS, certain benefits may be taxable at the Federal level, while some disability benefits may be exempt. New York doesn’t tax any benefits under this program, though if you choose to move to another state, that state may seek taxes on these benefits, depending on their laws.

Does New York Tax Social Security Disability Benefits?

Generally, the state of New York doesn’t tax Social security disability benefits. Benefits you receive may be subject to Federal taxes but typically won’t be subject to any additional state taxes. That can make a significant difference, especially when you aren’t able to work because of your disability.

Are Survivor Benefits Taxable?

This is another question that often comes up when discussing disability benefits. People who are receiving disability benefits may be concerned about any benefits their spouses and children could receive if they pass. The answer is that they may be taxable, but only if they exceed certain income thresholds.

According to the IRS, the taxability of any disability benefits depends on the beneficiary’s income. To determine whether the government can tax the benefits, the IRS looks at one-half of the benefits plus all other income. If that exceeds $25,000 for a single individual, then part or all of the benefits may be taxed.

How a Disability Lawyer Could Help

For many people, disability benefits can make all the difference in the world. But these benefits can come with complex rules around taxes that could cause problems down the line. If you need to seek disability benefits, a lawyer could help by:

  • Explaining the tax implications of your benefits
  • Showing how lump sum benefits could be applied to prior tax years
  • Advising you about your options and helping you decide the best path forward
  • Managing the stress and paperwork involved in a disability claim
  • Advocating for you and your benefits throughout the disability claim process

Contact Us About Your Benefits

If you have questions about how disability could affect your taxes, contact Fusco, Brandenstein & Rada, P.C. now. The taxes around disability benefits can be a confusing maze of rules and regulations. But our team of experienced disability lawyers can guide you through the process from start to finish.

There’s no need to handle a disability claim or disability tax questions on your own. Call us at 516-496-0400 or contact us online now for your free consultation.