Disability Income Taxation
The income you receive from disability income insurance may or may not be taxable as follows:
INDIVIDUAL DISABILITY INCOME INSURANCE: Because you pay the premiums or entire cost of the policy with after-tax-dollars, the disability benefits or income you recieve are tax-free.
EMPLOYER-SPONSORED GROUP DISABILITY INSURANCE: If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premiums. If you pay the total premium using after-tax income, then your benefits are tax-free. If your employer pays the total premium, and does not include the cost of the coverage in your gross taxable income, then your benefits are taxable-income. If both you and your employer paid the premiums for the policy, then your tax liability will be split as well. The part of the benefit your receive that is related to the employer-paid share of the premium is taxable-income; any part of the benefit related to your share of the premium is tax-free income.
CAFETERIA PLANS: If you pay your share of the premium with after-tax-dollars, that portion of the benefits will be considered tax-free income and you'll be taxed only on the portion of the benefit related to your employer's contribution. If you pay your share of the premium with pre-tax dolars, that portion of your benefits will be considered taxable-income and you'll have to pay tax on all of your benefit.
If you pay the premiums through a cafeteria plan, and you didn't include the amount of the premiums as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable income.
GROUP ASSOCIATION DISABILITY INSURANCE: If you pay the premiums, the benefits you receive are tax-free. You cannot deduct the cost of the premiums.
Social Security Disability Benefits:
Your social security disability benefit is taxable if your provisional income (modified adjusted gross income plus one-half of your social security benefit) exceeds the base amount for your filing status.
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 (MAGI) plus half of the social security benefits you received.
The base amount is: (note these amounts may change over time)
$25,000 if you're filing single, married file separately lining apart all year, or head of household.
$32,000 if you're married filing jointly.
$0 if you're marrief filing separately and lived together with your spouse at any point in the year.
When you enroll in Medicare, if you pay the premiums for the medical insurance portion of Medicare, you may be able to deduct these premiums as a medical expense if you meet the eligibility rules for itemizing deductions and medical expenses on Schedule A of form 1040.
Medicare benefits you receive are not taxable.
Generally if you receive a disability benefit from worker's compensation, that benefit is not taxable. Any benefits paid to your survivor would also be tax-free. If you return to work and continue to receive payments, then your worker's compensation benefit is taxable income. NOTE that if part of your worker's compensation benefit offsets (reduces) your social security benefit, then that part is considered to be a social security benefit and may then be taxable according to the rules governing social security.
Disability benefits you receive from the Department of Veterans Affairs, are not taxable, except for certain payments for rehabilitative services.
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