Content of the material
- When Is Short-Term Disability Taxable?
- Is Disability Insurance Taxable?
- When is disability income taxable?
- Taxing Social Security disability income
- Taxing disability insurance
- When do I pay tax on disability benefits?
- Short term disability income is usually taxed by the IRS
- Long term disability income can be taxed or not taxed by the IRS
- You may owe tax on Social Security Disability income – depending on what other income you have
- You may also owe state and local taxes
- Frequently asked questions about disability benefits and tax issues
- Is disability income taxable federally?
- Do I have to file taxes on my disability income?
- Can you file taxes for disability income?
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When Is Short-Term Disability Taxable?
The IRS considers short-term disability to be a type of sick pay. As such, it’s generally only considered to be taxable income if your employer paid the premiums in part or in full. It’s also taxable if you paid your own premiums (or a portion of them) with pre-tax dollars. For example, if your employer deducted your premiums from your pay and thenused the balance to calculate tax withholding, your short-term disability would be taxable.
Here's how it breaks down:
- If your employer paid 100% of your premiums, all of your short-term disability income is taxable.
- If you and your employer split the premiums exactly 50/50, and if you paid your portion of the premiums with after-tax dollars (not paycheck deductions), half of it would be taxed.
- If you paid all your premiums yourself with after-tax dollars, your benefits are not taxable.
Your short-term disability benefits aren't taxable if you receive them from a policy for which you personally paid all premiums, such as if you bought your own policy that's not tied to your employer.
Is Disability Insurance Taxable?
Disability benefits may or may not be taxable. You will not pay income tax on benefits from a disability policy where you paid the premiums with after tax dollars. This includes:
- A policy you bought yourself with after-tax dollars
- A employer sponsored policy you contributed to with after-tax dollars. These rules apply to both short-term and long-term disability policies. Income from social security disability isn’t taxable if your provisional income isn’t more than the base amount. Provisional income is your modified adjusted gross income (AGI) plus half of the social security benefits you received. The base amount is:
- $25,000 if you’re filing single, head of household, or married filing separately (living apart all year)
- $32,000 if you’re married filing jointly
- $0 if you’re married filing separately and lived together with your spouse at any point in the year
- Your modified AGI includes all other income without subtracting exclusions for:
When is disability income taxable?
Different types of disability benefits have different tax requirements under IRS rules.
Taxing Social Security disability income
SSI payments are not taxable.
SSDI benefits, like other Social Security income, must be reported on your tax return. Whether you pay tax on those benefits depends on your total income and benefits for the year.
You may have to pay federal income tax on your SSDI benefits if the total of half of all your SSA benefits, other than SSI, plus all your other income (including tax-exempt interest) is greater than the base amount for your filing status. If you’re married and file a joint return, you have to calculate your total based on all your income and your spouse’s income combined, even if your spouse didn’t receive benefits.
The base amounts are …
- $25,000 for single, head of household or qualifying widow(er)
- $25,000 if you are married filing separately and lived apart from your spouse for the entire year
- $32,000 for married filing jointly
- $0 if you are married filing separately and lived with your spouse at any time during the tax year
Taxing disability insurance
The federal tax rules for private disability insurance payments depend on who paid the premiums and how they were paid.
Generally, if your employer paid the premiums, then the disability income is taxable to you. If you paid the premiums, the taxability depends on whether you paid with pretax or post-tax dollars. A pretax deduction is taken out of your pay before any taxes are withheld, so it reduces your taxable income. Post-tax deductions are taken out after your income and payroll taxes have been withheld.
“When it comes to the IRS, it’s a simple concept: Pay me now or pay me later,” says Michael Menninger, a certified financial planner with Menninger & Associates in Trooper, Pennsylvania. “If an employee pays with after-tax dollars (pay me now) into their disability policy, whether through their employer or into a private policy, then the benefit is tax-free.”
On the other hand, if the premium is paid with pretax dollars, then you receive the tax advantage now, and any disability payments you receive in the future would be taxable income.
Sometimes, the employer and the employee split the premium. In that case, Menninger says, if the employer pays a portion of the premium and the employee pays the remainder with after-tax dollars, then the payout is only partially taxable.
These rules apply only to federal income taxes. Depending on where you live, you may also have to pay state and local income taxes on your disability benefits. It’s a good idea to check with your state and local taxing authorities or your tax professional to learn about the laws in your area.
When do I pay tax on disability benefits?
The rules for determining whether federal tax is owed on LTD or STD income depend on two things:
- Who paid the premiums – you or your employer?
- How were premiums paid – with pre-tax dollars or after-tax dollars?
Generally speaking, the tax rules work like this: if your employer paid the premiums, then the income you get on disability is taxable. Likewise, if you paid the premiums with pre-tax dollars, then your disability income is also taxable. However, if you paid the premiums with after-tax dollars, then your disability income payments are free from federal taxes. In other words, the IRS either takes tax upfront (before premiums are paid), or they take tax on the back-end (from your weekly or monthly disability check). That means:
Short term disability income is usually taxed by the IRS
When your employer pays for the policy (as is typically the case with STD), the IRS considers those premium payments to be untaxed income – so they take taxes on the back-end when you make a claim and get benefits. However, if you paid for some or all of the premiums with your own after-tax dollars, then that portion of the income is not subject to federal tax.
Long term disability income can be taxed or not taxed by the IRS
Long term disability income plans can be paid for by the employer, the same as STD. When the employer pays the premium, the payments while disabled will be taxable income. However, if you paid for some or all of the premium with your own after-tax dollars, then that portion of the income is not subject to federal tax.
You may owe tax on Social Security Disability income – depending on what other income you have
Is Social Security Disability taxable? The rules aren’t so simple, because it depends on the amount of other benefits you receive from the Social Security Administration (if any) plus your additional income (including sources that are usually tax free, such as U.S. Savings Bond interest). In any case, these disability benefits need to be reported on your tax return along with other Social Security income; according to the SSA website, these are the rules for determining whether and how much you’ll owe the IRS in taxes:
You will pay tax on only 85 percent of your (SSDI and retirement) benefits, based on Internal Revenue Service (IRS) rules. If you:
*Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income“
You may also owe state and local taxes
This information only applies to federal income tax; depending on where you live, your disability income benefit may also be subject to state and local taxes. To avoid unpleasant surprises, it’s a good idea to consult a local tax professional or local government tax agency.
Frequently asked questions about disability benefits and tax issues
Is disability income taxable federally?
Whether you pay tax depends on what kind of policy it is, who paid for it, and whether it was paid for with pre-tax or after-tax dollars. The income should be reported on your tax return, employer-paid short and long term disability income is subject to federal tax. SSDI disability benefits may be considered taxable disability income – and subject to federal income tax – if you have enough additional income.
Do I have to file taxes on my disability income?
You typically have to report disability benefit income on your tax return, but if the premiums were paid for with after-tax dollars, then you should not owe federal tax on that money. If premiums were paid by your employer, then your benefit income will be taxable. SSDI income must be reported along with other Social Security benefits, and it may be taxable if you have enough additional income.
Can you file taxes for disability income?
Yes, you should file an income tax return for your disability benefits, and you can even have federal tax withheld. To withhold tax for SSDI, file IRS Form W-4V. If you are receiving disability benefits from an insurance company, you can have tax withheld by filing IRS Form W-4S.
Navigating the tax treatment around disability payments can be tricky, which is why we’re here to help. For more help on determining if you need to pay tax on disability insurance, get help from a tax pro at H&R Block. Find a tax office near you.
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