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It only takes a single jarring moment to throw your life off the rails. While we all avoid thinking about the horrific and the impossible, accidents can happen and shatter your world. Disability can strike out of nowhere due to accident, medical emergency, or just age–by some estimates, one out of four of today’s 20-year-olds will be disabled before the age of 67. It’s a sobering thought: many of us won’t be able to work until retirement age.
This may be a heavy conversation at a festive time of the year, but it’s important to understand how your needs and options will change should you become disabled. While the financial issues may seem small compared to the vast changes disability will bring to your life, they’re important in the long run and should be considered carefully. Let’s begin.
Social Security and Disability
Social Security is widely misunderstood in the popular consciousness, and that is doubly true when disability enters the picture. Broadly, there are two forms of Social Security that may apply to a person with a disability. The first and most commonly discussed is Social Security Disability Insurance or SSDI. Intended to replace a worker’s lost income, SSDI is perhaps the primary Social Security safety net for formerly employed people facing disability.
Less well known but equally important is another Social Security program: Supplemental Security Income, or SSI. SSI is calculated based on financial need, not work history, and is intended as another means to supplement the income of those unable to work.
SSDI and SSI are separate programs with separate application processes, although most of the documents you’ll need to apply are the same. They also open the door to other benefits. For instance, if you qualify for SSDI you can apply for Medicare early in order to help cover your medical expenses.
Disability and Taxation
Few aspects of our lives are unaffected by taxation, and this includes disability and disability benefits. Let’s start with a big and obvious question: are your disability benefits taxable? Well, that depends on the source of the benefits and your individual situation. In general, disability benefits received from an employer or an insurance company are subject to taxation. By contrast, SSDI and SSI benefits may or may not be subject to taxation, depending on your situation and other sources of income. Navigating this set of regulations may require the help of a financial advisor or tax professional, as the rules and laws involved can be quite complex.
In addition to taxes levied on your disability benefits, there may be additional tax deductions or tax credits available to the disabled. For older people or those who are 100% disabled, the federal Tax Credit for the Elderly and Disabled may apply. There are several federal tax credits aimed at the blind or visually impaired as well. Other tax benefits may include deductions for needed care or for home modifications or improvements made necessary by the disability in question. There are a variety of such deductions and benefits available, and it’s wise to take a moment and familiarize yourself with them before you need to apply them to your own taxes.
Life with a disability may not be an appetizing thought, but the fact remains that many people with disabilities lead rich full lives. A newfound disability is not the end, just another chapter in life, and your financial planning should reflect that.
