Is Disability Pay Taxed?
If you suffer some disabling ailment or injury, you'll be glad to have disability pay coming in. However, it's important to understand that the IRS -- and your state -- may want to take a cut of that pay. Some sources of disability pay will be taxed as income, while others are completely tax-free, and still others may or may not be taxed depending on the situation.
If you have a qualifying disability, you may start receiving Social Security disability benefits long before you're eligible for retirement benefits. Social Security disability becomes taxable under the same circumstances that Social Security retirement benefits do. In brief, if you file a joint tax return with your spouse and your taxable earnings plus half your Social Security benefits add up to more than $32,000 per year, your benefits will be partially taxable. If you're single or married filing separately, the threshold is $25,000. Depending on your income, up to 85% of your Social Security disability pay may be subject to federal taxes.
Most states do no levy a Social Security tax, but the following 12 do: Connecticut, Colorado, Iowa, Kansas, Montana, Minnesota, Nebraska, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Source: Fool.com
