The article below is accurate for tax years prior to 2018. Some tax information below has changed for your 2018 and later tax returns. Learn more about tax reform here.
Video transcript:
Hello, I’m Jill from TurboTax, with important news for taxpayers who receive disability income.
If you are wondering whether you can still file a tax return despite receiving some type of disability income, rest assured that the IRS will always accept your return—even if it reports zero taxable income.
On the other hand, you shouldn’t assume that all forms of disability income are tax free and that you don’t have to report it on a return. But even if you find that your disability income is taxable—it doesn’t automatically mean that you have to file a tax return.
The first thing you should determine when deciding whether to file a tax return is if your disability income is taxable.
If you receive a disability pension from a private plan that your former employer pays for, all of your disability pension income is likely to be taxable.
- And if you receive Social Security payments for your disability, some of these payments may be taxable if you earn additional income during the year.
- However, don’t confuse this with supplemental security income or SSI payments you receive for your disability—those are not taxable.
Other forms of disability income that aren’t taxable include:
- Payments you receive under a workers’ compensation statute or from the Department of Veterans Affairs.
- Usually, you can also exclude from your tax return other government disability payments you receive because of an injury or sickness you suffer while working for certain government organizations, such as the Foreign Service.
In the event some or all of your disability income is taxable, your next step is to assess whether filing a tax return is necessary.
- You are only required to file a tax return when your total income—excluding tax-exempt disability benefits—is at least equal to the sum of one personal exemption and the Standard Deduction for your filing status.
- This means that even if your disability benefits are subject to tax, if the amount is below this threshold, you don’t have to file a return or pay any tax on it.
If you do end up paying tax on your disability income and you are retired on permanent and total disability—you should determine if you are eligible to take the tax credit for the elderly and disabled to reduce whatever tax you might owe. A tax credit can be extremely valuable since it reduces the tax you owe on a dollar-for-dollar basis.
Remember, when you use TurboTax to file your tax return, we’ll ask you simple questions and recommend the best filing status for you.
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