Lump-sum SSDI awards for new beneficiaries require special attention; Allsup outlines other cost-saving tax tips.
More than 1 million people with severe disabilities became beneficiaries under the Social Security Disability Insurance (SSDI) program last year. But many of them are likely to improperly report their SSDI payments on their income tax returns, according to Allsup, a nationwide provider of Social Security Disability Insurance representation and Medicare plan selection services.
“It can take months and sometimes years to receive Social Security disability benefits. So, many people receive a one-time, lump-sum amount that includes back payments,” said Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center. “One of the most frequent questions we receive from claimants at this time of year is whether SSDI benefits are taxable and how to report lump-sum payments on their tax return.”
Up to 50 percent 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. For 2011, a federal income tax return must be filed if gross income is at least $19,000 for couples filing jointly and $9,550 for individuals.
“The average monthly SSDI benefit for 2011 was $1,072.96 or $12,875.54 for the year. As a result, many people relying on SSDI will not owe taxes,” Gada said. “A problem can occur, however, if they mistakenly report all of a lump-sum payment received in 2011 as 2011 income, in which case they could end up paying too much in taxes.”
According to Gada, it’s essential that both individuals and their tax preparers understand how to report SSDI 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,” Gada explained. “This means recipients do not have to go through the time or expense of filing amended returns, or pay higher taxes on their current year’s income.”
People who received a lump-sum SSDI payment in 2011 will see this amount included in Box 3 of the Form SSA-1099 they receive from the Social Security Administration (SSA). Worksheets provided in IRS Publication 915 and discussed in Allsup’s free online guide, Managing Your Taxes, can be used to determine the taxable portion of a retroactive SSDI payment. However, Gada cautions it can be extremely difficult to do this by hand and recommends seeking help from a knowledgeable tax professional or, at the very least, investing in tax preparation software that covers this.
Other Money-Saving Tax Tips and Free Tax Filing Help
About 8.6 million disabled workers received income through the Social Security Disability Insurance program in 2011, including new beneficiaries.
Below, Allsup highlights additional tips that may help people with disabilities and their caregivers save on their taxes. More information is provided in Allsup’s Managing Your Taxes guide on Allsup.com, including links to free tax filing assistance resources.
- Earned Income Tax Credit (EITC). This is a refundable tax credit of up to $5,751. When it’s applied, it could result in a refund. To be eligible, a taxpayer or a spouse needs to have been employed for part of 2011, earned below $13,660 to $49,078 (depending upon filing status and the number of children claimed) and had investment income of $3,500 or less. “Many people with disabilities don’t file a tax return because their income is so low,” Gada said. “But you could lose out on thousands of dollars from the EITC if you don’t file a tax return.”
- Credit for people with disabilities. Taxpayers are eligible for this credit of up to $7,500, if they receive taxable disability income from a former employer’s accident, health or pension plan and meet income requirements. For 2011, adjusted gross income (AGI) must be under $17,500 for single filers, under $20,000 for joint filers with one spouse eligible for the credit, or under $25,000 for joint filers with both spouses eligible.
- Dependent care credit. Taxpayers who pay someone to care for a dependent or spouse with physical or mental impairments may be able to take a credit of up to 35 percent of day care costs while they are working or looking for work.
- Increased standard tax deduction. People who are blind or visually impaired may be able to take a higher standard tax deduction.
- Medical deductions. Taxpayers who itemize can deduct medical costs if those costs exceed 7.5 percent of their AGI. Deductible expenses include medical and dental costs, travel expenses for treatment, long-term care and medical insurance premiums, and costs for certain equipment for people with disabilities. Taxpayers with a chronic illness, or with a spouse or child with a chronic illness, may be able to deduct costs for attending conferences related to that illness.
- Deduct the costs of seeking SSDI benefits. Taxpayers who hired a representative such as Allsup to help them get SSDI benefits and who itemize can deduct the representation fee paid from the taxable part of their benefits.
For more information on Social Security disability benefits, please contact the Allsup Disability Evaluation Center at (800) 678-3276.