Do I Have to Pay Taxes on SSDI Lump-Sum Back Payments?

When you apply for Social Security disability insurance (SSDI) benefits, you will likely wait many months or even a few years for your claim to be approved. If the Social Security Administration (SSA) takes a long time to approve your disability benefits, you'll likely receive a large back payment covering the months or years you waited.

Like your monthly disability benefits, your SSDI back pay is partially considered taxable income. The good news is you might not have to claim the entire lump-sum disability back payment on your taxes the year you receive it. And, even better, most people don't have to pay any taxes on their SSDI monthly benefits or back money.

When Is Your SSDI Back Pay Taxable?

First, understand that many people won't owe any taxes on their SSDI monthly payments or their back pay because their income is too low. If you file taxes as a single person and have less than $25,000 in income for the year (including half of the Social Security disability payments and back pay you received), you won't owe any taxes on your Social Security disability income.

Likewise, if you and your spouse file taxes as "married filing jointly" and you have income that's less than $32,000 (counting half of your disability payments and back pay) for the year, you won't owe any taxes on your disability income.

Disability back pay can bump up your taxable income in the year you receive the lump-sum payment from Social Security. If some of your back pay covers disability benefits you were entitled to from previous years and you claim all that income in one year, you might end up paying more taxes than you have to.

Tax laws allow you to "attribute" (assign) part of your back payment to prior years—that is, to the years you were entitled to receive those benefits, instead of the year you actually received the payment. Counting some of your back pay as income for prior years makes it less likely that you'll have to pay taxes on your SSDI benefits.

How to Avoid Overpaying Taxes on a Lump-Sum Disability Payment

If your back pay and income are more than the above thresholds for having to pay taxes, the IRS will allow you to allocate your past-due disability benefits to the year you should have received them. You don't have to "amend" your prior year's tax returns to do it. You simply pay any taxes owed for prior years with your current year's tax return (and you check line 6c on your Form 1040 for the "lump-sum election").

If you received SSDI back pay, Social Security should have sent you a tax form called an SSA-1099. The "Description of Amount in Box 3" section on the form will say how much of your disability back payment was owed to you for each of the previous years.

For example, let's say you received 25 months of SSDI back pay totaling $45,016. Your SSA-1099 Box 3 description would show how much was deducted for your Medicare premium and attorney's fees (if any), and then it could say something like:

• $17,608 paid in 2023 for 2023
• $17,225 paid in 2023 for 2022
• $2,614 paid in 2023 for 2021

You'll use this information to determine whether you owe taxes on each year's disability back payments.

Here's how it works: For the years you weren't receiving monthly SSDI payments, add half of the amount of your disability back pay for a given year to your other income for that year. If your combined income for each prior year was less than $25,000 (or $32,000 if you're married), you won't owe any taxes on your disability back pay for that year.

For the year you did collect regular monthly SSDI payments (probably the most recent year), add half of the back pay and half of your regular SSDI payments for the year to your other income for that year. If your combined income for a year was less than $25,000 (or $32,000 if you're married), you won't owe any taxes on your disability back pay for that year.

IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits describes how to spread the lump-sum payments over prior years in full and provides three worksheets for doing so, but it can still be challenging to figure out how to do it. You may want to talk to a tax professional or use tax preparation software to make the calculations for you.

What Can I Deduct From My Back Pay Before Taxes?

There are times when you can deduct certain expenses from your disability back pay. For instance, if you had to use some of your back pay to repay a private insurance company for long-term disability benefits you received, you might be entitled to a deduction or tax credit. (Check with a tax expert first.)

If you hired an attorney to help you with your disability claim, Social Security will pay your lawyer directly from your back payment and then send the rest to you. You can deduct the amount of your attorney's fee from the back pay you received, and you don't have to pay taxes on this amount. Learn more about how disability lawyers are paid.

Can I Have Social Security Withhold Taxes From My SSDI?

Social Security doesn't automatically withhold taxes from your monthly SSDI benefit or your lump-sum disability back payment, because most people don't have to pay taxes on their SSDI. You're only likely to owe federal taxes on your monthly SSDI benefits if you have other income, such as:

• investment earnings
• rent you collect from tenants, or
• a spouse's earnings.

But you can ask Social Security to withhold a portion of your SSDI benefits if you think your income will be high enough that you have to pay federal income taxes on your disability payments. To have taxes withheld, complete an IRS Form W-4V to set up Voluntary Tax Withholding (VTW). You can elect to have 7%, 10%, 15%, or 25% of your monthly benefit withheld for taxes.

But it's probably a good idea to talk with a tax professional before you submit the form to your local Social Security office. That way, you can ensure you have enough withheld to avoid a big annual tax bill, but not more than necessary.

Can the IRS Take Your SSDI Back Pay?

Yes, the IRS can take at least some of your SSDI back payment, but only if you owe certain debts like back taxes, past due child support, and unpaid student loans. Learn more about when your Social Security benefits can be taken to pay off debts.