Do I pay taxes on disability benefits?
It can be somewhat confusing for most people to determine whether their long-term disability insurance benefits are taxable. Disability benefits may or may not be taxable depending who made the premium payments and whether those payments are deductible.
Social Security disability insurance (SDDI) benefits may be taxable; the IRS provides further explanation of when these benefits may or may not be taxed.
Individual disability insurance policies
If your benefits are coming from a private disability insurance policy, then the benefits are typically not taxable. This is because the premiums are usually paid with after-tax dollars.
This also means that you are not eligible to claim the premiums as a medical deduction when filing your tax return.
Group disability insurance policies
If you are of of the millions of Americans with an employer-provided long-term disability insurance policy, then taxability of the benefits would be based on who pays the premiums.
If the employee pays the premiums using after-tax income, benefits are tax-free. However, if the employer pays the premiums, benefits are taxable. If you and your employer split the premium costs, you will also split the tax liability.
This means that only the benefits that can be attributes to the employer-paid portion of the premium are taxable, while benefits attributed to your premium – paid with after-tax dollars – are tax-free.
However, taxability differs if you – the employee – use pre-tax dollars to pay your portion of the premiums. For example, if you use money earmarked in a medical reimbursement or cafeteria plan to fund the premium, your disability benefits are taxable.
Have questions about your disability claim?
The taxability of disability benefits can be complex. If you are still struggling to receive your disability benefits or your claim as been denied, contact a top-rated disability attorney for help.
DarrasLaw is an award-winning and nationally pre-eminent litigation firm that specializes in short-term and long-term disability law and ERISA litigation. Our award-winning disability attorneys and top-rated ERISA lawyers have over 100 years of combined litigation and claim experience in helping our clients timely file valid claims and fight wrongful delays, denials, and terminations of insurance coverage.
We know how to get the individual or group disability benefits you deserve, and stand by our clients every step of the way. If you would like a completely free policy analysis and free claim consultation, Call us at (800) 458-4577 or email us for a free policy analysis and free claim consultation.