State disability income is generally taxable by the IRS. This means that any money you receive from your state’s disability insurance program will be included in your taxable income. This is regardless of whether you receive benefits from Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). If you receive disability income from both state and federal sources, the federal portion may be tax-free, but the state portion will still be subject to income tax. It’s important to be aware of how state disability income is taxed so that you can plan accordingly and avoid any unexpected tax liability.
State Disability Income and Federal Taxation
Generally, state disability income is not taxable on federal income tax returns. This is because disability income is considered tax-exempt under federal law.
Deductibility of State Income Taxes on Federal Returns
- State income taxes paid on state disability income are deductible on federal income tax returns. This is because state income taxes are considered deductible “miscellaneous itemized deductions” on Schedule A (Form 1040 or 1040-SR).
- The deduction for state income taxes is subject to certain limitations. It is phased out for higher-income taxpayers.
- For 2023, the deduction for state and local income taxes is eliminated for taxpayers who itemize their deductions. Instead, taxpayers can elect to take a standard deduction of $13,850 ($27,700 for married couples filing jointly).
Examples
The following are examples of how state disability income is taxed (or not taxed) on federal income tax returns:
| Scenario | Federal Taxability of Disability Income |
|---|---|
| John receives $1,000 in state disability benefits per month. | John does not have to pay federal income taxes on the $1,000 per month he receives in state disability benefits. |
| Mary receives $2,000 in state disability benefits per month and pays $100 in state income taxes on the benefits. | Mary does not have to pay federal income taxes on the $2,000 per month she receives in state disability benefits. She can deduct the $100 in state income taxes paid on the benefits on her federal income tax return. |
State Disability Income Taxability
State disability income may or may not be taxable by the IRS, depending on the state in which you reside and the type of disability income you receive. Generally, disability benefits received from the Social Security Administration (SSA) are not taxable at the federal level. However, disability benefits received from other sources, such as employers or private insurance companies, may be taxable.
Some states have their own disability income programs, and the taxability of these benefits varies from state to state. For example, in California, state disability benefits are not taxable at the state level. However, in New York, state disability benefits are taxable at the state level.
Impact of State Income Tax Refunds on Federal Taxes
If you receive a state income tax refund, the amount of the refund may affect your federal income taxes. This is because state income tax refunds are considered to be income for federal tax purposes. Therefore, if you receive a large state income tax refund, you may have to pay more federal income taxes.
The following are some tips for minimizing the impact of state income tax refunds on federal taxes:
- Estimate your state income tax liability accurately.
- Make sure to have enough federal income tax withheld from your paycheck.
- If you do receive a large state income tax refund, consider saving it or investing it for future use.
| State | Taxability |
|---|---|
| California | Not taxable |
| New York | Taxable |
| Texas | Not taxable |
| Florida | Not taxable |
| Illinois | Taxable |
State Income Tax Exemptions and Credits
State disability income may be taxable by the IRS, but it can also be eligible for certain exemptions and credits. The taxability of state disability income varies depending on the state in which you live and the type of disability income you receive. Some states exempt all disability income from taxation, while others only exempt certain types of disability income, such as Social Security Disability Insurance (SSDI) benefits.
- State Income Tax Exemptions
The following states exempt all disability income from taxation:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Texas
- Washington
- Wyoming
- State Income Tax Credits
Some states offer income tax credits for taxpayers who receive disability income. These credits can reduce the amount of state income tax you owe. The following states offer income tax credits for disability income:
| State | Credit Amount |
|---|---|
| California | Up to $5,000 |
| Colorado | Up to $3,000 |
| Connecticut | Up to $1,000 |
| Hawaii | Up to $1,000 |
| Illinois | Up to $1,000 |
| Indiana | Up to $500 |
| Iowa | Up to $1,000 |
| Kentucky | Up to $1,000 |
| Maine | Up to $1,000 |
| Maryland | Up to $1,000 |
| Massachusetts | Up to $5,000 |
| Michigan | Up to $500 |
| Minnesota | Up to $1,000 |
| Missouri | Up to $1,000 |
| Montana | Up to $1,000 |
| Nebraska | Up to $1,000 |
| New Jersey | Up to $1,000 |
| New York | Up to $1,000 |
| North Carolina | Up to $1,000 |
| Ohio | Up to $1,000 |
| Oregon | Up to $1,000 |
| Pennsylvania | Up to $1,000 |
| Rhode Island | Up to $1,000 |
| Utah | Up to $1,000 |
| Vermont | Up to $1,000 |
| Virginia | Up to $1,000 |
| West Virginia | Up to $1,000 |
| Wisconsin | Up to $1,000 |
If you receive disability income, you should contact your state tax agency to determine if your income is taxable and if you are eligible for any exemptions or credits.
State Income Tax Withholding
If you receive state disability income, it may be subject to state income tax withholding. The amount of withholding will vary depending on your state of residence and the amount of your income. You can usually choose the amount of withholding taken out of your disability payments. If you do not choose an amount, your state will withhold a standard amount.
You can make estimated tax payments to your state if you do not want to have income tax withheld from your disability payments. Estimated tax payments are due on April 15, June 15, September 15, and January 15. You can make estimated tax payments online, by mail, or by phone.
Estimated Payments
- You can make estimated tax payments to your state if you do not want to have income tax withheld from your disability payments.
- Estimated tax payments are due on April 15, June 15, September 15, and January 15.
- You can make estimated tax payments online, by mail, or by phone.
Table of State Disability Income Tax Withholding Rates
| State | Withholding Rate |
|---|---|
| Alabama | 5% |
| Alaska | 0% |
| Arizona | 4.5% |
| Arkansas | 6% |
| California | 7.25% |
Hey there, folks! Thanks for sticking with me on this little tax adventure. I hope you’ve found it informative and not too mind-numbingly boring. If you’ve got any burning disability income tax questions left, feel free to drop me a line. I’m always happy to chat tax stuff. In the meantime, take care and I’ll catch you later for more tax-related shenanigans!