How is Social Security Disability Back Pay Taxed?

If you’ve recently been awarded SSDI and received a lump sum of back pay, you may be wondering whether this income is taxable and how it could affect your annual tax return. In this blog, we’ll break down what you need to know about SSDI back pay and your tax responsibilities, including thresholds for income, potential deductions, and whether you have to pay taxes on SSDI backpay.

Are Social Security Disability Benefits Taxable?

In general, SSDI benefits can be taxable—but it depends on your total income and filing status. The IRS considers your benefits taxable if your combined income exceeds certain thresholds. Combined income includes your adjusted gross income, any nontaxable interest, and half of your Social Security benefits.

Here are some quick guidelines:

• Individuals: If your combined income is more than $25,000, up to 50% of your SSDI benefits may be taxable.
• Married couples filing jointly: If your combined income exceeds $32,000, up to 50% of benefits may be taxable. If it exceeds $44,000, up to 85% of benefits may be taxable.

Do I Earn Enough to Owe Federal Income Tax?

Not everyone who receives SSDI will owe taxes. Many recipients live on limited income, and if your total income—including half your SSDI—falls below the IRS thresholds, you may not owe any taxes at all.

For example, if you receive SSDI and do not have significant income from other sources (like a spouse’s earnings or investment income), your total combined income may fall under the taxable range. In that case, even if you receive a lump sum of back pay, you may not have a tax liability.

Can I Deduct a Repayment to a Long-Term Disability Policy?

Another important consideration arises if you previously received long-term disability (LTD) insurance benefits while waiting for your SSDI approval. If your LTD policy required you to repay those benefits after receiving SSDI back pay, you may qualify for a tax deduction or credit.

This repayment is often treated as an “offset,” and depending on the amount, the IRS might allow you to deduct the repayment under the claim of right doctrine. In general:

• If the repayment is less than $3,000, you can deduct it as a miscellaneous itemized deduction (subject to limitations).
• If it’s $3,000 or more, you might be eligible for a tax credit or a deduction—whichever provides a greater tax benefit.

SSDI back pay finally arrived – a lifeline you deserve! But is the taxman coming? Hold on! Taxability depends on your income, filing status, and other benefits. Don't let confusing rules take what's yours. Reach out to a benefits advisor to find out whether you have to pay taxes on SSDI backpay.