Most people have a love/hate relationship with taxes. You love the things they pay for, but you hate paying for them. And when it comes to the things you need, you'd probably rather not pay a whole ton of money in taxes on them.
Your independent insurance agent can help guide you in the ways of disability insurance and how it applies to your taxes. They're a great resource and should be number two on your speed dial right after your spouse. But first, it's time to talk a bit more about disability insurance and how taxes apply to it.
What Is Disability Insurance?
Simply put, disability insurance is designed to help supplement your income if you should become disabled or critically ill from a non-work-related event.
Disability insurance will typically payout 40%-70% of your income in benefits, though how much your policy will pay depends on the coverages you choose. Some disability insurance policies are meant for short-term disabilities or minor illnesses, while others are in it for the long haul and pay out for years.
Typical claims a disability insurance policy will pay out for:
- Musculoskeletal injuries and disorders: Injuries to your musculoskeletal system, usually by jarring of soft tissue. These are common and happen a lot.
- Pregnancy and birth: Disability benefits can be applied to pregnancy, such as maternity leave, birth, and complications from either.
- Cancer, heart disease and illness: Disability policies are paying out more and more for disease, and among the top-rated are cancer and heart disease.
- Any other injury: These would be non-work-related injuries that make you unable to perform your regular work duties.
Which Disability Insurance Policies Are Taxable?
Now on to the good stuff — taxes and how they apply to your disability insurance benefits. Seems like they shouldn’t, but some of the facts may surprise you.
Which disability insurance benefits are taxable?
- Social Security disability benefits and taxes: These are, and they're not. If you file a federal tax return as an individual and your combined total income is more than $25,000, then you have to pay taxes on your Social Security disability benefits.
- Individual short-term disability benefits and taxes: If your employer paid the taxes on your short-term disability insurance, then yes, your benefits are taxable. If you pay the premium on your own, then the benefits are not taxable because they were paid with taxed dollars.
- Individual long-term disability benefits and taxes: These aren't usually taxable if you pay them with your own after-tax dollars. But if your employer pays for the premiums, then other rules may apply.
- Group short-term and long-term disability benefits and taxes: Both group short-term and group long-term disability insurance are a little different. If you pay the premium with after-tax dollars, then your benefits are not taxable. If your employer pays the premium and does not include the amount in your gross income at the end of the year, then the benefits are taxable to you.
Are Employer-Paid Disability Benefits Taxable to You?
This was already alluded to above, but if your employer pays the premiums for your short-term disability insurance, then the benefits are taxable. For long-term insurance benefits, the same rules apply.
But if your employer took out a long-term disability policy on you because you are a key employee and paid the premium, then the benefits would not be taxable to the company.
Concerning group short-term and group long-term disability, it gets a bit different as discussed before. These babies are taxable to you if your employer doesn't include the premium amounts they paid in your total gross income.
This is important stuff to chat with your independent insurance agent about, so make sure you do.
Railroad Disability Benefits and Military Disability Benefits
Railroad disability benefits and military disability benefits are available to those who have worked/are working for a railroad or the military. Benefits do include some disability pay, among other retirement funds in each category.
Railroad disability benefits and taxes:
Railroad disability benefits: These may be taxable depending on a very lengthy mathematical equation. It’s best to get the details from an independent insurance agent on this one, but just know they can be taxed.
Military disability benefits and taxes:
Military disability benefits: Military disability benefits are excluded from taxable income most of the time, as they should be.
If you qualify for these benefits, it's important to speak to an independent insurance agent so everything you deserve is on the table. An independent insurance agent can both guide and consult you on all the finer points of railroad and military disability benefits while helping to fill in any gaps if the coverage isn't sufficient.
What's So Great about Independent Insurance Agents?
Tired of researching about disability insurance, or any other insurance for that matter? That’s why independent insurance agents were invented, to help you navigate the world of insurance.
An independent insurance agent is a licensed pro who knows how to find exactly what you want for the best possible price. They find you the best carriers with the best coverage and pricing to fit your budget.
So go on, give your local independent insurance agent a call. They're all geared up to help and they know a thing or two about what you need.