Short Term Disability Insurance Taxes

(Well, it's complicated — there are a few things you should know about first)

Short term disability insurance taxes

Taxes can help pay for a lot of great things, but of course no one ever wants to pay them, and especially a lot of them. And the question is often asked about short-term disability insurance. Is it taxed or not? This is a great question for an independent insurance agent.

Your local independent insurance agent is the key to your short-term disability insurance planning. They know a thing or two about short-term disability insurance, how and if it’s taxed, and a whole lot more. But first, here's a bit more background on the topic before you make that call.

What Is Disability Insurance?

In a nutshell, disability insurance is used as income replacement if you suffer an injury, illness, or disability and can't bring in a paycheck. 

Typically covering between 40%-70% of your salary, this can be a big help when you need to focus on recovering. But there are a number of different types of disability insurance out there to choose from, such as:

  • Individual long-term disability insurance: This disability insurance, you guessed it, is for the long term with benefits that pay out for years and sometimes decades, depending on coverage.
  • Individual short-term disability insurance: This is just like long-term disability, but think days and months instead of years and decades. This will also provide coverage for pregnancy and birth events too.
  • Group long-term disability insurance: Group long-term provides coverage to a group of employees through your employer. It provides disability coverage for years, and normally a health exam is not needed to qualify. That’s a big bonus.
  • Group short-term disability insurance: This is another employer-offered group plan and very similar to group long-term disability coverage. The difference is this policy is for months of disability coverage, not years. A lot of times it's paid for by your employer, but not always.

Government-backed disability programs: 

  • Social Security disability insurance: This is a federal, payroll-funded disability benefits program run by the great ol' United States of America. Yep, it’s a great place to be.
  • Disability state programs: Disability state programs are offered in only 5 states out of the whole 50. They are temporary disability programs and the coverages vary from state to state.
Are Long-Term Care Policy Premiums Tax-Deductible
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Is Short-Term Disability Insurance Taxable?

Now here's the answer you’ve all been waiting for. Drum roll please — it depends. Most of the time no, but there are exceptions to every rule, and this one is no different. 

In both individual and group short-term disability policies, the benefits may not be taxed. If the premiums are paid with post-tax dollars, and this is likely the case, then your short-term disability benefits are not taxed; so don't expect to get a 1099 for your short term disability. That means more money in your pocket when it really counts.

However, if your employer pays your short-term disability premium and they don't include the amount paid in your gross wages each year, then your benefits will be taxable.

So, as you can see, it depends.

Is Short-Term Disability Insurance Tax Deductible?

There is no trick answer on this one. The answer is simple. No, your short-term disability insurance is not tax-deductible. Why, you may ask? Because the IRS doesn't consider your short-term disability insurance premiums as a medical expense. 

You're technically receiving replacement income in the event you become disabled, ill, or injured. You are not, however receiving payment for medical care. 

Some people don’t agree, but the IRS makes the rules when it comes to taxation and that’s the way the cookie crumbles sometimes.

What about for the Self-Employed? Can You Deduct Your Short-Term Disability Insurance Premiums?

It’s always good to double-check, but the IRS doesn’t change its stance on your short-term disability premiums being tax-deductible if you are self-employed. They still don’t see your short-term disability premiums as a medical expense making them not tax-deductible.

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How an Independent Insurance Agent Can Help

An independent insurance agent can be your knight in shining armor when it comes to figuring out your disability insurance. When you feel like it's hopeless to find the right kind of coverage at the right price, they gallop in with coverage options that all fit right inside your budget.  

And when it comes to getting answers on questions like tax deductions and so on, they've got your back. Go on, give your local independent insurance agent a call and get going on your short-term disability insurance before it’s too late.

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