Posted by Carmen Garcia

What Is Supplemental Security Income & How Does It Work?

What Is Supplemental Security Income & How Does It Work?

Supplemental Security Income (SSI) is a benefit program administered by the Social Security Administration that provides monthly payments to people facing significant physical and financial challenges. Over 7.9 million people received SSI benefits in January 2021.

Although Social Security manages the SSI, it does not pay for it. Unlike general Social Security benefits, which are largely funded by the Social Security taxes that most workers pay, SSI payments primarily come from the general revenues of the U.S. Treasury. Most of the states supplement these federal benefits through their own payments.

To be eligible for SSI, you must be disabled, blind, or at least 65 years of age and have very limited financial resources. In 2021, the maximum monthly benefit available with federal funds is $794 per month for one person and $1,191 for a couple who jointly file for the program. Social Security deducts what it considers "countable income" from the benefit, so if the countable income exceeds the values above, you can't receive the SSI.

Social Security has an intricate formula for determining what income factors affect eligibility for SSI. For example, the money you earn from work matters, but not everything. Regular pensions and social security benefits are recorded. Some government benefits, such as meal vouchers and home energy assistance, are not income tax refunds.

Another proof of eligibility is your financial resources, which cannot exceed $2,000 for a person and $3,000 for a couple. Some important assets, such as home and car, are not counted towards this limit. But Social Security will include, but not be limited to, your bank accounts, bonds, money, stocks, and real estate other than your main residence.


Will my Social Security disability benefits be taxed?

Social Security Disability Benefits (SSDI) may be taxable, but most people who receive disability benefits do not earn enough to pay their taxes. About 1/3 of beneficiaries of social insurance for people with disabilities pay some tax. This may be due to the spouse's income or other sources of income. In contrast, those who receive Supplemental Security Income (SSI) do not pay taxes.


Federal taxation of social security disability benefits

This is how it works. If you are married with a joint application, and you and your spouse earn more than $32,000 per year, some of your SSDI benefits will likely be taxed. If you are single and earn more than $25,000 per year, some of your SSDI benefits may also be taxed.

The taxable amount of SSDI benefits depends on how much you earn. The IRS sets the tax limit for Social Security disability benefits at the following limits:

  • $0 if you are married and filing separately and live with your spouse at any time during the fiscal year.

  • $25,000 if you are married filing separately, and you live separately from your spouse throughout the year,

  • $25,000 if you are single, qualified caregiver or widow(er),

  • $32,000 if you are married and filing a joint declaration,

This means that if you are married and file a joint tax return, you can have a combined income of up to $32,000 before paying taxes. There are two different types of taxes the IRS can apply, depending on the income you are reporting and your claim's status.

If you are single and filing an individual tax return, you will pay taxes for:

  • Up to 50% of benefits if income is between $25,000 and $34,000

  • Up to 85% of benefits if income exceeds $34,000

If you are married filing jointly, you will pay taxes for:

  • Up to 50% of benefits if total income is between $32,000 and $44,000

  • Up to 85% of benefits if total income is over $44,000

Simply put, the more income you earn as an individual or as a couple, the more likely you are to pay taxes on Social Security disability benefits. Regarding the actual tax rate that applies to these benefits, the IRS uses its marginal tax rate. Therefore, you would not pay a tax rate of 50% or 85%, but you would pay the normal tax rate, depending on which tax category you are in.

It's also important to know that you may be pushed into a higher tax category if you receive Social Security disability back payments. This is because these back payments can be paid as a lump sum to cover the periods you were disabled, but you can still wait for your disability claim to be approved. Most cases last for months or even years, so all those months of waiting are months in which Social Security can reimburse you if approved. This can lead to more tax support. The good news is that you can apply some of these benefits retroactively to previous years' tax returns to allocate your tax obligations. You should submit a correct statement and seek help from your tax professional.


Summary

  • Blind or children with special needs may be eligible for SSI, depending on their condition and the family's financial situation.

  • SSI benefits are closely linked to your living situation and your personal or family finances. Beneficiaries should keep Social Security informed of any changes in these circumstances, from a new job or a pay rise to a relative who moves in and contributes to the household expenses.

  • SSI is different from Social Security Disability Insurance or SSDI. SSDI eligibility is determined by your status and how long you've worked and paid Social Security taxes. You can benefit from both programs.


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Carmen Garcia
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