What Type of Tax is Used as Income by Retired People and People with Disabilities?

Retirement and disability income can be confusing because tax treatment depends primarily on the source of the payment. The same amount of income may be fully taxable, partially taxable, or excluded from taxable income depending on where it comes from, how it was funded, and how much other income you receive.

Some retirement and disability income is subject to federal income tax, while other benefits are generally exempt. State tax rules can also differ, meaning where you live may affect your total tax liability. Pension payments and traditional retirement account withdrawals are often taxable. Social Security and SSDI benefits may be taxable in some situations, while SSI and VA disability compensation are generally excluded from federal taxable income.

Quick Answer: What Tax Applies to Retirement and Disability Income?

The primary tax that may apply is federal income tax, although state income tax may also apply. Tax treatment depends on the source of the money, your filing status and other income, whether a retirement account is traditional or Roth, and, for disability insurance, how the premiums were paid. 

The table provides a general overview. Your actual tax treatment can depend on factors such as your filing status, income, the type of benefit, and how the benefit or account was funded. 

Is Social Security Retirement Income Taxable?

Social Security retirement benefits may be taxable based on your combined income, including AGI, nontaxable interest, and half of your benefits. Benefits are generally not taxable below $25,000 for single filers or $32,000 for married couples filing jointly. 

At higher income levels, up to 50% or 85% may be included in taxable income. For example, a single filer with $30,000 in combined income may have up to 50% taxable. State rules may vary.

Are Pensions and Retirement Account Withdrawals Taxable?

Pension income is generally taxable at the federal level unless part of the payment represents previously taxed contributions or another exclusion applies. Traditional 401(k) and traditional IRA withdrawals are also generally taxable because contributions may have received a tax benefit when they were made.

Roth accounts work differently. Qualified withdrawals from Roth IRAs and Roth 401(k)s are generally tax-free because contributions were made with after-tax dollars. A $20,000 withdrawal from a traditional 401(k) will generally be included in taxable income, while a qualified $20,000 Roth IRA withdrawal generally will not be.

Required minimum distributions from certain traditional retirement accounts can also increase taxable income once they begin.

Is Disability Income Taxable?

Disability income is not all taxed the same way. The type of benefit and, in some cases, who paid the insurance premiums can determine whether payments are taxable. 

SSI

Supplemental Security Income (SSI) is generally not included in federal taxable income. SSI is a needs-based program and differs from Social Security Disability Insurance (SSDI). 

SSDI

SSDI benefits may be taxable based on combined income, including AGI, nontaxable interest, and half of SSDI benefits. Benefits are generally not taxable below applicable thresholds, while up to 50% or 85% may be taxable at higher incomes. Taxable benefits are included in income, not paid directly as tax.

Disability Insurance

Disability insurance is often taxed based on how premiums were paid. If an employer paid the premiums, benefits may be taxable. If you paid premiums yourself with after-tax income, benefits are generally not taxable. When both you and your employer contributed, different portions of the benefit may receive different tax treatment. 

Are VA Disability Benefits and Military Retirement Pay Taxable?

VA disability compensation is generally exempt from federal income tax. Military retirement pay is different and is generally taxable, although certain military-related payments may receive different treatment. Some states also provide exemptions or deductions for military retirement income. 

Can Retirement or Disability Income Affect Your Tax Bracket?

Taxable retirement or disability income can increase your total taxable income and potentially move some income into a higher federal tax bracket. However, federal tax brackets are marginal, so moving into a higher bracket does not mean all of your income is taxed at the higher rate. 

Will Taxes Be Withheld From Retirement or Disability Benefits?

Tax is not automatically withheld from every retirement or disability payment. Depending on the income source, you may be able to request withholding or may need to make estimated tax payments. Reviewing withholding can help prevent an unexpected bill when you file. 

A Tax Credit Worth Knowing About

Some taxpayers may qualify for the Credit for the Elderly or Disabled. It may be available to certain people age 65 or older or to qualifying taxpayers under 65 who are permanently and totally disabled. Income and other requirements apply.

The credit is nonrefundable, meaning it can reduce tax owed but generally cannot create a refund beyond your tax liability.

Federal vs. State Tax on Retirement and Disability Income

Federal and state rules do not always treat retirement and disability income the same way. Income taxable federally may qualify for a state exemption or deduction. Before estimating your tax liability, review both federal rules and the rules in your state. 

The Bottom Line

Retirement and disability income tax rules vary by source. Social Security and SSDI may be partially taxable, while pensions and traditional account withdrawals are generally taxable. SSI and VA disability benefits are usually tax-free. If you are unsure how your specific income sources will be treated at tax time, our tax return filing services can help you review each source and file accurately based on your situation.

Frequently Asked Questions

Is retirement income taxable?

It depends on the source. Pensions and traditional retirement account withdrawals are often taxable, while Social Security may be partially taxable depending on income. Qualified Roth withdrawals are generally tax-free. 

Is SSDI taxed the same way as SSI?

No. SSI is generally not included in federal taxable income, while SSDI may be partially taxable depending on your combined income.

Are disability insurance benefits taxable?

It often depends on who paid the premiums. Employer-paid coverage may result in taxable benefits, while benefits from coverage paid with after-tax dollars are generally tax-free. 

Are VA disability benefits taxable?

VA disability compensation is generally excluded from federal taxable income.

Are 401(k) withdrawals taxable?

Traditional 401(k) withdrawals are generally taxable. Qualified Roth 401(k) withdrawals are generally tax-free. 

How can I reduce taxes on retirement income?

Tax planning may involve managing withdrawal timing, choosing between traditional and Roth accounts, reviewing other income sources, and planning for required minimum distributions.