When individuals think about Social Security, they most likely focus on present or future retirement benefits. Millions of people, however, receive benefits from two other related programs: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). The year-end 2016 report from the Social Security Administration (SSA) showed that more than 10.6 million people received SSDI benefits, and 8.25 million collected SSI. Considering those numbers, it is likely that many will have an interest in possible cash flow from these sources, either for themselves, a spouse, or another family member.

In order for applicants to become eligible for SSDI or SSI, they must meet the considerable program requirements. CPAs who learn the basics of SSDI and SSI may be able to help certain individuals fill out the applications properly, increasing the chance of success. Such expertise can become a valued service and possibly a revenue generator.

The SSDI Program

SSDI provides benefits to people (as well as their families) who cannot work because of a medical condition. To qualify, the condition must be expected to last at least one year or result in death. Moreover, a disabled worker usually must meet 1) a recent work test, based on age at the time of becoming disabled, and 2) a duration of work test to show how long payments were made to the Social Security program. Certain blind workers must meet only the duration of work test.

Under the recent work test, someone who became disabled in or before the quarter of turning age 24 must have worked 1½ years during the three-year period ending with the quarter the disability began. If the disability occurred in the quarter after turning age 24 but before the quarter of turning age 31, the requirement is work for at least half the period from the quarter after turning 21 to the quarter of becoming disabled. Finally, if the disability occurred in the quarter after turning 31 or later, the requirement is work for at least five years out of the 10-year period ending with the quarter the disability began.

The other test, for duration of work, generally requires a total of 1½ years of work for a disability before age 28. That requirement gradually increases to a total of 9½ years for a disability at 60 or older.

Even after passing both tests, applicants for SSDI benefits must undergo an extensive review process before collecting. In 2017, the average disability benefit for a disabled worker, spouse, and one or more children is approximately $2,000 a month.

The SSI Program

SSI provides benefits for certain individuals who need extra income. SSI benefits are payable to those who are 1) at least age 65, 2) blind, or 3) disabled. Blindness is defined as follows: vision in one’s better eye must be 20/200 or less with a corrective lens. To qualify as disabled, an adult must have a condition that will prevent gainful work for at least a year or until death.

The next step is to show limited income. If a person’s income is under the annual federal payment standard, SSI will make up the difference with cash. The first $20 of monthly income is not counted for this calculation; the remaining amount is counted and deducted from the federal standard, assuming all other qualifications are met.

The most important other qualification is a lack of resources; the applicant must have no more than $2,000 in bank accounts, securities, and other assets. (For married couples, the limit is $3,000). Certain assets are not counted in this calculation, including a personal residence, household goods, and a vehicle used to transport the applicant or a family member.

Note that if an SSI applicant or a spouse gives away an asset or sells it for less than current value, SSI benefits may be delayed for up to 36 months. The actual waiting period will depend on the current standard benefit amount and the value of the asset relinquished, so giving away more resources will result in a longer SSI delay.

U.S. citizens qualify for SSI if all the above conditions are met. Noncitizens may qualify, but other requirements are in effect.

Tax Considerations

Benefits received under the SSI program are not taxed. Indeed, SSI benefits are not reported to the IRS, and recipients do not receive an annual Form 1099 for this income. SSI benefits often avoid state income tax as well, although some states may ask for information about cash flow from SSI.

SSDI benefits are treated the same as Social Security retirement and survivor’s benefits, so they may be taxed. Taxation depends on the calculation of combined income (CI), also known as provisional income. CI is calculated by adding half of annual benefits received to all other income, including tax-exempt income and other exclusions from income. CI is then compared to certain base amounts; if it is under $25,000 (for single filers) or $32,000 (for couples filing jointly), no federal income tax will be imposed on benefits. Over these thresholds, a gradually increasing portion of SSDI benefits will be taxed, up to 50%. Eventually, CI may reach a second set of thresholds: $34,000 for singles and $44,000 for joint filers. Ultimately, up to 85% of benefits can be taxed.

Many SSDI recipients will have CI below $25,000 (single) or $32,000 (joint) and will thus owe no tax on their benefits. Taxpayers far above $34,000 or $44,000 in CI probably will owe tax on 85% of their benefits. In the middle, however, some planning may help reduce the amount of CI. Investing in municipal bonds will not help because tax-exempt interest is fully included in CI, but taking capital losses to offset taxable gains or investing in no-dividend stocks or growth funds might pay off. If it is possible to convert a traditional IRA to a Roth IRA at a low tax rate, in part or in full, this might also cut future taxable withdrawals and thus reduce future CI because Roth IRAs lack required minimum distributions.


People who are disabled may qualify for one or more tax breaks. These opportunities include:

Back pay from SSDI. Many people who qualify for SSDI receive a lump sum up-front, reflecting the time between becoming disabled and the onset of regular Social Security payments. To avoid being pushed into a higher tax bracket, recipients can spread the income over previous tax years without filing amended returns. CPAs who are familiar with the required calculation may help individuals save substantial amounts.

Tax-free benefits. Workers’ compensation benefits and any compensatory damages for injuries usually avoid income tax. The same may be true of disability income insurance payouts, assuming the recipient paid the premiums with after-tax dollars. Disability income benefits are taxable, however, if the premiums were paid by an employer or through a pre-tax cafeteria plan.

Disability tax credit. A tax credit for the elderly and disabled is available to taxpayers who are 65 and older, providing they meet certain income tests. The same credit, with the same income thresholds, is available to those under 65 who no longer work because of permanent and total disability. To take this credit, the individual must have taxable disability income that is 1) paid under an employer’s accident/health plan or pension plan and 2) included in income as wages (or payments instead of wages) for the time of absence from work because of the disability.

In addition, this disability tax credit is available only if adjusted gross income is less than $17,500 for single filers, heads of household, or qualifying widowers with a dependent child. Nontaxable Social Security and pension income must be no more than $5,000. Married couples filing jointly have thresholds of $20,000 and $5,000, respectively. Those who qualify can calculate the amount of the credit, which can be up to $5,000 ($7,500 on a joint return), on Schedule R, filed with the annual personal income tax return. Again, CPAs can provide valuable help with this computation.

Applying for SSDI

The SSA encourages people to apply for disability benefits online at http://bit.ly/2ndNvlr. Alternatively, applicants can call the agency’s toll-free phone number (800-772-1213) to make an appointment at a local Social Security office to apply in person. Yet another option is to set up a phone interview for the applicant to begin the process. According to the SSA, the initial disability claims interview often takes about one hour.

By making an appointment for a personal or a phone interview, the applicant will receive a “Disability Starter Kit” to help prepare. There actually are two starter kits, one for adults and one for children under age 18; both are available online at http://bit.ly/2n7qinQ.

SSDI applicants have the right to be represented by a “qualified person” of their choice, such as a knowledgeable CPA. It is best to begin walking the individual through the process as soon as possible, because processing an application for disability benefits can take three to five months.

As might be expected, there is a basic “Application For Disability Insurance Benefits” to begin. Online, there are several screens to flip through, but the entire application can be studied at http://bit.ly/2mrbrlm. The SSDI application requires a great deal of personal information but does not require medical reasons for the disability. Nevertheless, the online application can take an hour or longer.

The SSA provides a list of information that applicants must have to move their application along. These include the applicant’s—

  • Social Security number;
  • birth or baptismal certificate;
  • contact information for doctors, caseworkers, hospitals, and clinics that have taken care of the applicant, along with dates of care;
  • names and dosage of current medication;
  • medical records from doctors, therapists, hospitals, clinics, and caseworkers that applicants already have;
  • relevant laboratory and test results;
  • a summary of previous work, including type of work and where it took place;
  • copies of recent W-2 Forms, or for the self-employed, recent federal income tax returns.

In addition, SSDI applicants must fill out other forms. Various documents collect medical information and how it affects the ability to work, while other forms give permission to the doctors, hospitals, and other healthcare professionals who have treated the applicant permission to submit information about her medical condition. One key form is SSA-827, “Authorization to Disclose Information to the Social Security Administration (SSA),” which is used by the SSA and state disability agencies to determine an applicant’s eligibility for benefits.

If applications for disability meet the basic requirements, the case will be forwarded to the applicant’s home state disability agency. That agency will check into the applicant’s health and determine if a benefit is warranted. If so, the SSDI program will mail a confirmation letter with the amount of the disability benefit. If the application is not approved, the SSDI letter will explain why and provide details on the appeals process. Publication 05-10041, “The Appeals Process,” is available at http://bit.ly/2mroK4V.

Some reports indicate that approximately 75% of the applications for SSDI are initially rejected. Many are appealed, often through attorneys, and many appeals have been successful. Indeed, some observers believe that SSDI appeals have been too successful, and the federal government has been cracking down. SSDI payments to hundreds of recipients have been suspended, with applicants forced to go through the process again. In addition, some law firms have begun to specialize in this area. CPAs also may be able to help qualified applicants apply for SSDI and, if indicated, appeal any rejections, hopefully without drawing criticism of questionable behavior.

Applying for SSI

A 23-page application for SSI can be found at http://bit.ly/2n7voAH. There is no online application, so the process generally calls for a visit to the local Social Security office. Other documents will be required; the list is similar to that for SSDI applicants, but also includes information on the applicant’s residence; payroll slips, bankbooks, insurance policies, burial fund records, and other information about income and possessions; proof of U.S. citizenship or eligible noncitizen status; and banking records.

SSI applicants who are rejected can appeal the decision. Publication 05-110 08, “Your Right To Question A Decision Made On Your Supplemental Security Income (SSI) Claim,” explains the steps to be taken and can be found at http://bit.ly/2mrqzPj.

Millions of taxpayers may be eligible for SSDI, SSI, or both. CPAs who assist applicants in going through the process may gain the gratitude of existing clients, and possibly find new long-term business.


[ ] Tap health savings accounts to pay unreimbursed costs if available.

[ ] Advise on itemizing for out-of-pocket medical expenses; keep receipts for this purpose.

[ ] Recognize that modifications to a home to accommodate a disability are tax deductible.

[ ] Check on eligibility for disability insurance benefits.

[ ] Check on eligibility for the child and dependent care credit.

[ ] Explore eligibility for SSDI benefits, which are taxable to the same extent as retirement benefits.

[ ] Consider voluntary withholding on benefits by filing Form W-4V.

[ ] Determine whether to take distributions from IRAs or qualified retirement plans, which are penalty free before age 59½ in case of disability.

[ ] Investigate special tax rules for people with disabilities.

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Board.
James R. Grimaldi, CPA is a partner at Citrin Cooperman.
James A.J. Revels, CPA is a partner at Citrin Cooperman.