The Good and the Bad: Tax Season and Spring Break

If you readers notice that this blog is late, I have two excuses.  Spring Break and Tax Season.  While it would be more entertaining to write about the former, I am taking a plunge and writing about the latter as it pertains to people with disabilities and some of their situations.  As a disclaimer, I am not a tax professional.  Please consult with your tax professional about your specific situation(s) before making tax decisions.

Q. Is Supplemental Security Income taxable?

A. No, SSI is never taxable.  This includes both current SSI payments and lump-sum-retroactive payments.

Q. Is Social Security Disability Insurance (SSDI) taxable?

A. Yes, SSDI may be taxable depending on the recipient’s other income.  SSDI follows the same rules as Social Security retirement benefits.  The IRS uses a figure called “provisional income” to determine if SSDI is taxable at all and how much of it is taxable.  “Provisional income” is the sum of one’s adjusted gross income, any non-taxable interest income (for example, from municipal bonds) and 50% of one’s Social Security benefits (retirement or SSDI).  For people, whose filing status is Single, Head of Household, or qualifying Widow(er), Social Security benefits are not taxable if the “provisional income” is less than $25,000.  If provisional income is between $25,000 and $34,000, up to 50% of the Social Security payments may be taxable.  If Provisional Income is greater than $34,000, up to 85% of the Social Security benefits may be taxable.  For those filing Married Jointly, the “bend” points are $32,000 and $44,000.

Q. Are SSDI retroactive payments taxable and if so, how are they treated?

A. Yes, SSDI retroactive payments may be taxable according to the rule above for SSDI current payments.  You must pay taxes on the SSDI retroactive payment in the year that it is received.  You cannot amend your prior year returns to include the portion of the retroactive payment attributable to that particular year.  However, you can use your prior year’s income to calculate the portion of the SSDI retroactive payment that is taxable.  For example, if you receive in July of 2025 a retroactive SSDI payment that covers a time period from January 1, 2024, to June 2025, you can use your 2024 income to determine the taxable portion of the payment attributable to 2024.  Alternatively, you can calculate the taxable portion of the entire retroactive payment based on your 2025 income.  You can choose the method that results in the lowest tax payment.  Please consult your tax professional.

Q. Are Social Security Benefits paid to a child on a parent’s work record taxable?

A. Yes, Social Security benefits paid to a child may be taxable.  Whether they are taxable depends on the child’s “Provisional income” and will be calculated the same as for an adult.  The calculation does not include any parental income.  This applies to Social Security benefits paid to a minor child as well as so-called “Childhood Disability Benefits”, also known as “Disabled Adult Child” benefits that are paid to an adult child with a disability.

Q. Do contributions to an ABLE account generate income tax deductions or credits? 

A. ABLE contributions are not generally deductible at the Federal level.  However, workers with disabilities, who contribute to their own ABLE from their earned income, may be eligible for the Federal “Savers Credit”.  Moreover, some states allow for deductions or credits on the contributor’s state income tax return.  Please use this handy tool at the ABLE National Resource Center to determine whether your state does: https://www.ablenrc.org/state-plan-search/.

Q. Are distributions from and ABLE account taxable?

A. Generally, distributions from an ABLE account are not taxable provided that the distributions are used for Qualified Disability Expenses.  You can find information about QDE’s from the ABLE National Resource Center here: https://www.ablenrc.org/what-is-able/what-are-able-accounts/.

Q. If I roll over funds from a 529 College Savings Plan to an ABLE account, is it a taxable event?

A. No.  If you roll over funds from a 529 to an ABLE account, it is a non-taxable transfer, provided the beneficiary of each account is the same person.  Note that the rollover does count towards the annual contribution limit.

Q. Can I roll over funds from a 401(k), 403(b), IRA or similar retirement account to an ABLE account?

A. Even though ABLE was designed for and can function as a retirement-account alternative for a worker with disabilities, IRS regulations do not provide for rollovers between retirement accounts and ABLE accounts.  Before considering moving funds out of a retirement account, do the research to determine whether a retirement account is a countable resource for the particular program in which the worker is enrolled or needs to enroll.  If it is, and accumulation in the retirement account could render the account holder ineligible for the program, s/he can withdraw the funds from the retirement account, pay income tax on any accumulated investment earnings, and then deposit  the remaining funds as part of her/his annual ABLE contribution.  Note that although income tax will be payable on the withdrawal, the account holder may avoid the 10% penalty for withdrawal before at age 59 and a half if s/he is “permanently and totally disabled” according to IRS rules.  

Q. How are Supplemental or Special Needs Trusts taxed?

A. This question exceeds the range of this blog.  Please consult your tax professional and your estate planning attorney for information about your specific trust(s).  Here are some general guidelines, though.  If a trust is unfunded, it has no income and therefore no taxes are owed.  If the trust is considered a “grantor” trust by the IRS, then the trust income passes through the personal tax return of the grantors who created the trust—and is taxed at their rates.  If the trust is not a grantor trust, the trustee must file a tax return for the trust itself and income will be taxed at trust tax rates, which differ from individual rates.

Both Tax Season and Spring Break are coming to an end soon.  Please make sure to help your family member with disabilities take care of any tax responsibilities they might have.