The simple answer to this is that Social Security disability benefits are taxable. However, you “may or may not” have to pay tax on your disability benefits. Social Security issues a miscellaneous SSA 1099 for disability benefits paid each year.
The two potential types of Social Security disability benefits that are taxable are: A) Monthly disability benefit payments and B) Lump-sum back payments of disability benefits.
How much of your disability benefits will be taxable depends on the total amount of your Social Security disability benefits and any other income.
Currently, your Social Security disability benefits may be taxable if your total income exceeds $25000.00 as an individual, or $32000.00 for a couple.
Lump sum payments of retroactive disability benefits can be a little more tricky since they often involve payment for years prior to the year you receive your SSA 1099. Conventional wisdom seems to indicate that it is easier to just claim all the lump sum back payment in the year that you receive the payment rather than filing amended returns for any previous years.
The IRS publication 915 deals with Social Security benefit taxation and provides useful worksheets to help you figure out if your Social Security disability benefits are taxable.
There are also some potential deductions and credits for disability claimants who received a lump sum retroactive back payment of benefits. You may be able to deduct expenses that you paid to get your retroactive disability benefits. If you had a representative or attorney, you may be able to deduct their fee from the taxable part of your SSDI benefits.
If you had to repay your employer’s or your long-term disability insurance company out of your back payment, you may be able to deduct the amount you had to repay. These deductions can be complicated to figure out so it is advisable to obtain the services of a tax professional to help you calculate your deductions.
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Source: https://www.ssdrc.com/5-73.html
