Are SSDI Benefits Taxable in Chicago?
Social Security Disability Insurance (SSDI) benefits in Chicago and the rest of Illinois are not subject to state tax, but you may have to pay federal income tax on them if your combined income is above certain thresholds. The rules governing the taxation of SSDI benefits can be confusing. Below, you’ll learn more about tax thresholds and regulations to help you identify whether your benefits are taxable and plan adequately to avoid unforeseen tax liabilities and paying more taxes than necessary.
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If you have any concerns about SSDI benefits in Chicago, consult the SSDI attorneys at DePaolo & Zadeikis by calling 312-263-7560.
How Do SSDI Benefits Work?
The SSDI federal program provides monthly benefits to people who can no longer work because of a disability. The Social Security Administration (SSA) manages the program. To qualify for SSDI benefits, you must have worked long and recently enough and accumulated sufficient work credits. You must also have a condition that’s severe enough to prevent you from performing substantial gainful activity for at least 12 months or is expected to lead to death. For 2025, the SSA will consider you to be participating in substantial gainful activity if you earn over $1,620 per month or $2,700 per month for blind individuals.
When approved for SSDI, the benefit you’ll receive will depend on your average lifetime earnings before you became disabled. Certain family members may also be eligible to receive benefits based on your earnings record.
Most initial SSDI applications are denied. When your initial application is denied, you can file an appeal to challenge the denial. The SSDI appeal process has four levels, namely:
- Requesting for reconsideration
- Hearing by an Administrative Law Judge (ALJ)
- Requesting a review by the SSA Appeals Council
- Taking your case to a federal district court
Each level has specific procedures and deadlines. Pursuing the appeals process without legal representation could lower your chances of successfully challenging the denial. Experienced Social Security disability lawyers are familiar with the medical evidence required and SSA regulations that must be met. A disability lawyer will provide legal advice to help you navigate the appeals process, seek additional evidence to prove your eligibility, prepare you for hearings, advocate for your rights, and ensure you meet all the relevant deadlines.
Factors That May Impact the Taxability of SSDI Benefits in Chicago
Over 520,000 Chicago residents have a disability. Besides how to apply for disability benefits, taxation of SSDI benefits is a significant concern among people who can’t work due to disabling conditions. If you receive SSDI benefits, you may have to pay taxes on them. Several key factors determine the taxability of your SSDI benefits.
State Tax
Some states impose income tax on SSDI benefits. Rules for taxing the benefits vary among the states. Some apply their own state tax rates on the benefits you receive, whereas others use the federal tax rules to tax disability benefits at the state level.
The majority of states, including Illinois, don’t tax SSDI benefits. Although Illinois imposes income tax, it doesn’t treat Social Security disability benefits as taxable income. It exempts 100% of your SSDI and SSI benefits from state taxes. Nevertheless, you may still have to pay federal taxes on your SSDI benefits.
Most applicants seeking SSDI benefits in Chicago and elsewhere in Illinois don’t end up paying federal income taxes on their SSDI benefits. That’s because people with qualifying conditions for Social Security Disability obtain approval for benefits after proving they are unable to engage in substantial gainful activity. Most people who earn enough income to pay taxes under federal law wouldn’t qualify for disability benefits. However, certain factors could make you owe federal income tax on a portion of your SSDI benefits.
Filing Status
An SSDI recipient’s filing status may affect the taxation of benefits. Married couples who file taxes jointly have taxability assessed according to their joint income. The thresholds for SSDI taxation differ for individual and joint incomes.
The threshold amounts are $25,000 for single filers and $32,000 for those who are married and filing jointly. You won’t owe federal income taxes on your SSDI benefits if your total income for the year is beneath $25,000 if you file as a single filer. None of your SSDI benefits will be subject to taxes if you and your spouse file jointly and your combined income is below $32,000.
You’ll need to establish your combined income to know if your SSDI benefits are taxable. Your combined income is the sum of half of your SSDI benefits for a given year and all your other earned income, including tax-exempt interest. For joint filers, all other income includes income a spouse earned during that tax year. The SSA has an SSDI benefits calculator on its website that can approximate your benefits. The IRS has an Interactive Tax Assistant that can help you determine if your SSDI is taxable based on the income, benefit, and marital information you enter.
Amount of Income
If your combined income exceeds the threshold set by the IRS, a portion of the SSDI benefits you’ve received will be subject to tax. The incomes of SSDI recipients who have other sources of income, such as rental properties or other investments, or spouses who are working may exceed the tax thresholds. How much of your SSDI will be taxed depends on your income level.
You will pay income taxes on up to 50% of your SSDI benefits if you file individually and have a combined income of $25,000 to $34,000 or if you file a joint return and you and your spouse have a combined income between $32,000 and $44,000. Up to 85% of your SSDI will be taxed if you earn more than $34,000 as a single filer or are married and filing jointly and your combined income is over $44,000.
There’s no base amount for married couples filing separately and have lived with their spouse for any part of the year. In such cases, 85% of the disability benefits received are taxable even if the recipients didn’t have any other income. The purpose of this rule is to prevent couples from evading the taxes they would’ve had to pay if they were to account for their spouse’s income.
Remember, if your SSDI benefits are subject to tax, they’ll be taxed at the ordinary marginal income tax rate. The 50% and 85% amounts are percentages of SSDI benefits that are taxable, not the tax rate.
Lump Sum Payments of SSDI Back Pay
When determining the taxability of your SSDI benefits, you need to consider how much Social Security pays you for your past-due disability benefits. The SSA pays back payments to most people approved for SSDI or SSI benefits. A backlog of disability cases, claims processing delays, and having to navigate through a denial and appeals process cause applicants to wait months or years before they’re approved and start receiving disability benefits. By the time they’re approved, the SSA owes them back pay.
SSDI recipients receive the back pay they’re owed for the time they were disabled but weren’t receiving benefits in one lump sum. Just like SSDI monthly payments, lump sum SSDI back pay is taxable. Taxation isn’t an issue with SSI back pay. In fact, one difference between SSI and SSDI benefits is taxability. Both SSI monthly payments and SSI back pay are not taxable. SSI isn’t taxable at the federal level, and large SSI back pay amounts are usually paid in three installments.
Receiving an SSDI lump sum back payment could cause you to owe more taxes than you otherwise would for the year in which you receive it. It could bump your income over $25,000 as an individual or over $32,000 if you’re a married taxpayer, yet you could have been under these taxation thresholds without it.
Part of a large back pay could be income for one or more years back. Fortunately, you don’t have to count the whole lump sum back pay as income for the year you received it. The IRS allows you to assign prior year back pay benefits to those previous years in which you should have received them, rather than the actual year you received the lump sum. For example, if you were entitled to disability benefits for 34 months and received all of it as back pay in one year, you could apportion the back payment to each of the three years the benefits cover.
This reassignment of back benefits can help you minimize your taxable SSDI income for the current year and retain more of the disability benefits received. A tax professional and SSDI attorney can help you understand your rights and obligations.The taxability of your SSDI benefits shouldn’t make you hesitant to apply for disability benefits or appealing a denied claim. The attorneys at DePaolo & Zadeikis are dedicated to assisting people with disabilities in Chicago in navigating the SSDI application and appeals processes and receiving all the benefits to which they’re entitled. Our knowledgeable and skillful SSDI lawyers are available to evaluate your case and address your questions. Contact us today to set up a free consultation.
