Disability Insurance Tax Deductions

(The Best Things in Life Are Tax-free)

Reviewer: Jeffrey Green Written by Jeffrey Green
Reviewer: Jeffrey Green
Written by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Disability insurance and taxes

How does Uncle Sam get his share of your disability benefits? The good news is sometimes he doesn’t. How your disability benefits are taxed depends on who is paying the premium.

Taxable benefits and tax-free benefits affect your income and financial plan differently. Contact an independent insurance agent. Learn how to protect yourself and your family if a disability keeps you from working. 

What Is the Best Way to Pay for Disability Insurance?

Disability premiums are pretax or after tax depending on the plan. Pretax means that the premiums aren’t included in your income. After-tax means that the premiums taxes are paid after taxes are taken out. 

If the premiums are pretax, then the benefits are taxable. If the premiums are after-tax, the benefits aren’t taxable. Sometimes you don’t have a choice. But if you do, what is the best way? 

Paying with pretax dollars is a definite benefit today. Paying with after-tax dollars is a possible tax break in the future if benefits are paid.

Tax-free Disability Benefits

Individual Disability Plans

The benefits paid from an individual disability policy aren't taxable if you pay the premium. You can’t deduct the premiums for disability insurance as a medical expense.

Sometimes individual disability policies are purchased by a business for a group of employees. If the premiums are included in the employee’s wages, the benefits are not taxable. If the employer deducts the premium, the benefits are taxable to the employee.

Employer-Sponsored Plans

Voluntary and Association group disability are employer-sponsored plans. The premiums are paid by the employees or association members. Benefits are not taxable. The premiums aren’t deductible as a medical expense.

Workers' Compensation

Payments received from workers compensation plans are usually not taxable. There are a few exceptions.  Workers' compensation received at the same time as social security may be taxable. Sometimes workers' compensation is paid after returning to work. These payments would be taxable.

State Disability Programs

5 states have statutory disability programs, CA, HA, NJ, NY, RI.  The benefits are 26 weeks except in California. California benefits are 52 weeks. Maximum weekly benefits range from $170 in NY to $1,216 in CA. The benefits are not taxable.

Veterans Benefits

Veterans disability payments aren't taxable.

disability income

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Taxable Disability Benefits

Employer Paid Plans

If you are enrolled in a group disability plan and the employer pays the premium, benefits are taxable. If you pay part of the premium with after-tax dollars, only part of the benefit will be taxable. 

Employers can deduct group disability premiums.

Cafeteria Plans

Cafeteria plans are flexible and offer many options. Benefits are taxable if your employer paid the premium. If you paid with pretax dollars, the benefits are taxable. Benefits purchased with after-tax dollars aren't taxable.

Social Security

Social Security disability payments are taxed the same way as retirement payments. Up to 85% of the benefits may be taxable. The taxable part of the benefits depends on the total amount of your income and benefits for the year. 

Supplemental Social disability payments aren't taxable.

Disability Payments from Pension Plans

Payments are taxable as wages until retirement age. After retirement they are taxable as pension payments. The difference is that payroll taxes are taken from wages.

Protect Your Most Valuable Asset

Most people insure important assets against loss. Homeowners insurance, auto insurance and umbrella policies all provide protection.  

Fifty percent of working Americans don't have long-term disability insurance to protect their most valuable asset—the ability to earn income. A college graduate with a bachelor’s degree can expect to earn $2.4 million over their lifetime!

disability income

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Three Steps to a Solid Plan

 How your benefits are taxed makes a difference. If your benefits are taxable, you need more of them to pay your expenses. Here are three simple steps to take for a solid plan for disability:

1. Review your budget: Determine how much money is coming and going out each month.

2. If you were disabled, what are your sources of income? When do they start and end? Remember, taxable benefits provide less money.

  • Employer sick pay
  • Short- and long-term disability
  • Social security
  • Other household income
  • Savings

 Do your expenses exceed your income? If not, great job! If they do, by how much?

 3. Build an action plan: Consider buying personal disability insurance to supplement your income.

Why Go It Alone?

Disability insurance is an important part of smart financial planning. There is a lot to know about the coverage. Get the most out of your disability insurance policy. Contact your local independent insurance agent who can simplify the process for you. 

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