Tax Implications of Disability Insurance

We’re in the heat of tax season and you might be wondering about the tax implications of your disability insurance. This blog post will focus specifically on whether long-term disability insurance is considered taxable. For a more in-depth analysis, please check out the IRS website regarding taxing disability insurance.

The first dividing point in determining the tax implications of disability insurance is whether you pay the premiums yourself or whether your employer pays the premium.

Taxation of Employer-Paid Disability Insurance

If your employer pays for your disability insurance, you must report as income any amount you receive for your disability through an accident. In other words, if your employer pays for your disability insurance plan, the benefits will be taxed as income.

The IRS also notes, “If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and you did not include the amount of the premium as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.”

Taxation of Individual-Paid Disability Insurance

If you pay for your disability insurance yourself with after-tax dollars – without any help from your employer – then any money you receive based on a disability is not considered income on your tax return. Put another way, if you pay for your own disability insurance, then your disability benefits will be tax-free.

Often both the employer and the individual will both pay part of the premium on a disability insurance plan. In those instances, only the amount of money you receive when disabled that is due to your employer’s payments is considered income.

While the basics of taxation on disability insurance are pretty straight-forward, things can get a little more complicated if your disability insurance is part of a group association, under government disability insurance plans, and if you’re not sure whether premiums are being paid with pre or post-tax dollars. It’s a good idea to consult your tax adviser regarding taxation of disability insurance benefits.

For further information on the various types of disability insurance, check out our disability insurance information page. You can also request a disability insurance quote for free if you’d like.