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Do You Have To File Taxes On Disability Income?

Published on March 7th, 2024

Getting disability benefits feels like an impossible and endless journey challenge.

When tax time comes around, navigating your approved disability benefits can get even trickier. There are so many rules and it’s hard to know how you should file.

This is why getting help from an attorney that is well-versed in disability law, can make the world of a difference.

Understanding Taxability of Disability Benefits

Disability benefits, whether from Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), can significantly impact your tax situation. The need to file taxes on disability income depends on several factors, including the total amount of income received, the source of that income, and individual circumstances.

  1. Source of Disability Income: The taxability of disability income largely depends on its source. For instance, SSDI payments are usually taxable if you have other substantial income (such as wages, self-employment, interest, or other taxable income). In contrast, SSI benefits are not taxable.
  1. Filing Thresholds: As a recipient of SSDI benefits, you will need to file taxes if you meet certain income thresholds. For example, if your total income is more than $25,000 for an individual or $32,000 for a married couple filing jointly, including half of your SSDI benefits, you may need to file a tax return and potentially pay taxes on a portion of your benefits.
  1. Taxable Percentage: The percentage of SSDI benefits that may be taxable can vary. Up to 50% of your benefits may be taxable if you are filing individually with an income between $25,000 and $34,000, or up to 85% if your income is more than $34,000. For married couples, these income brackets are $32,000 to $44,000 and above $44,000, respectively.

Medical Conditions That Qualify For Disability Tax Credits

Understanding whether certain medical conditions qualify for disability tax credits is crucial. Generally, both physical and psychological disabilities can be eligible for tax credits, depending on how they impact an individual’s ability to work.

Examples Of Physical Disabilities That Qualify For Tax Credit:

  • Paralysis
  • Rheumatoid Arthritis
  • Severe Heart Disease
  • Blindness or Severe Vision Impairment

Examples Of Psychological Disabilities That Qualify For Tax Credit:

  • Depression
  • Bipolar Disorder
  • Post-Traumatic Stress Disorder (PTSD)
  • Schizophrenia
  • Autism Spectrum Disorder

Can I Deduct Attorney Fees For Social Security Disability Benefits?

Another important aspect of disability benefits and taxes is the deductibility of attorney fees. Yes, you can deduct attorney fees once you’ve obtained Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). These deductions are itemized and can reduce your taxable income, potentially lowering your tax burden.

How Are Attorney Fees Tax Deductible For Social Security Disability Benefits?

Dealing with the financial side of applying for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) often means needing legal help, which can lead to significant attorney fees. Fortunately, these fees might be tax-deductible, which can notably affect your tax situation. This makes understanding how to correctly deduct these costs a vital part of financial management for those receiving disability benefits.

Here’s a thorough explanation of how attorney fees for SSDI or SSI claims can be deducted from taxes:

  • Itemizing Deductions:
    • List your attorney fees on Schedule A of your tax return as itemized deductions.
    • This method is advantageous if your total itemized deductions are greater than the standard deduction for your filing status.
  • Threshold for Deduction:
    • These fees are deductible if they are over 2% of your Adjusted Gross Income (AGI).
    • To calculate AGI: Subtract certain deductions like IRA contributions, student loan interest, and alimony payments from your gross income.
    • For instance, with an AGI of $50,000, 2% is $1,000. Any attorney fees beyond this amount can be considered for deduction.
  • Types of Deductible Fees:
    • Only fees for actual legal services related to obtaining disability benefits are deductible.
    • General legal advice or services not specifically for your SSDI or SSI claim aren’t deductible.
  • Limits on Attorney Fees:
    • The Social Security Administration limits attorney fees to 25% of the back pay awarded or $6,000, whichever is lower.
    • Fees within these limits directly related to your disability claim are deductible.
  • Documentation and Record-Keeping:
    • Keep all invoices and receipts from your attorney.
    • Make sure your documentation clearly shows the services were for your disability claim.
    • Record all payment details, including dates and amounts.
  • Reporting and Compliance:
    • Accurately declare the deductible amount on your tax return.
    • Inaccurate reporting could lead to audits and penalties.
  • Seeking Professional Advice:
    • Given the complexities of tax law, seeking advice from a tax professional is recommended.
    • A tax advisor can assist you with the deductibility of attorney fees and other expenses.
  • Effect on Tax Burden:
    • Deducting attorney fees can lower your taxable income, but it doesn’t automatically mean a tax refund.
    • This deduction could place you in a lower tax bracket.
  • Additional Considerations:
    • Understand how itemized and standard deductions interact with your financial situation.
    • Assess if your total itemized deductions, including attorney fees, offer more tax benefits than the standard deduction.

Attorney fees linked to SSDI or SSI claims offer a chance for tax deduction, but careful adherence to IRS rules and thorough record-keeping is needed. For many, guidance from a tax professional is extremely helpful in making the most of this deduction and handling tax responsibilities.

Marriage, Disability & Taxes

Filing a federal tax return can be more complex when you’re married and receive disability benefits. If you’re a single head of household or married and file separately, you might need to pay income taxes on disability payments, like Social Security or SSI benefits. This depends on how much income you have in total.

If you’re permanently disabled, some costs, such as attorney fees for your disability claim, can count as business expenses on your taxes. Also, whether you can get the Earned Income Tax Credit (EITC) is based on how much you earn and your tax filing status. Being married and the type of disability benefits you get can influence this.

Choosing Miller Disability Law, PC

Navigating tax matters for disability income can be complex, and utilizing deductions effectively is crucial. At Miller Disability Law, PC, our focus on disability law equips us to assist you in understanding your tax obligations and identifying beneficial options.

For individuals receiving disability benefits who are seeking clarity on tax credits and deductions, we are here to provide assistance. Contact us at Miller Disability Law, PC for a free case evaluation.

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