Do I pay taxes on disability benefits?

It can be somewhat confusing for most people to determine whether their long-term disability insurance benefits are taxable. Disability benefits may or may not be taxable depending on who made the premium payments and whether those payments are deductible.

Social Security disability insurance (SDDI) benefits may be taxable; the IRS provides further explanation of when these benefits may or may not be taxed.

Individual disability insurance policies

If your benefits are from a private disability insurance policy, then the benefits are typically not taxable. This is because the premiums are usually paid with after-tax dollars.

This also means that you are not generally eligible to claim the premiums as a medical deduction when filing your tax return.

Group disability insurance policies

If you are one of the millions of Americans with an employer-provided long-term disability insurance policy, then the taxability of the benefits would be based on who pays the premiums.

If the employee pays the premiums using after-tax income, benefits are tax-free. However, if the employer pays the premiums, benefits are taxable. If you and your employer split the premium costs, you will also split the tax liability.

This means that only the benefits that can be attributed to the employer-paid portion of the premium are taxable, while benefits attributed to your premium—paid with after-tax dollars—are tax-free.

However, taxability differs if you—the employee—use pre-tax dollars to pay your portion of the premiums. For example, if you use money earmarked in a medical reimbursement or cafeteria plan to fund the premium, your disability benefits are taxable.

Is a Long-Term Disability Settlement Taxable?

The question is long-term disability taxable can be especially important to individuals who receive a lump-sum settlement instead of monthly benefits. You might receive an offer of a settlement – also called a buyout – if your condition is unlikely to improve. This is because the insurance company will try to avoid sending monthly payments all the way until you reach retirement age.

Accepting a settlement means that you forgo your right to receive ongoing monthly benefits and, instead, agree to receive a single payment that you will then allocate throughout your life. It is important to thoroughly discuss this financial settlement option with a seasoned disability insurance attorney before you accept a settlement, as you cannot change your mind and switch to monthly benefits down the road. Some factors to consider include:

• Your age and general life expectancy
• The chances that you might be able to perform your occupational duties again in the future full or part-time
• The strength of your disability claim and whether the insurance company is trying to continually dispute your benefits
• Whether the amount offered for the settlement is fair and reasonable with the right discount rate and mortality assessment
• Other sources of income and financial security that you have

This is a final decision, so consider all the factors involved, including whether long-term disability is taxable.

Unfortunately, there is not a simple answer regarding the potential taxability of disability settlements. Like monthly benefits, the taxability will depend on the type of plan you have and whether you pay premiums with pre-tax or post-tax dollars. Do not ignore this matter, however, as taxable settlements can impact your decision to accept a lump sum. Taxes can reduce a settlement by a significant amount, which might mean you should accept monthly benefits instead. Always discuss this matter with an experienced disability attorney.

Can You Deduct Disability Premiums from Your Taxes?

A lot of people wonder whether they can deduct premiums they pay for short-term or long-term disability coverage from their taxes. The general answer is that since the IRS does not include disability coverage costs to be qualified medical expenses, you cannot take this deduction. However, it is still important to keep up with premiums, even if they are not tax-deductible. You never want to risk your policy lapsing just before you suffer a disabling injury or illness and need coverage.

Receiving Your Disability Benefits

Whether your benefits will be taxable or not should never cause you to hesitate to file a timely, legitimate disability insurance claim if you suffered an injury or illness that prevents you from performing your occupation. If you (and/or your employer) pays the premiums for the policy you should be eligible to receive financial disability support, so do not delay in starting the claim process.

Insurance companies would prefer that you did not contact a disability lawyer, as some companies use tactics on unrepresented claimants to reduce, delay, or deny benefits. This is why it is always wise to have a trusted legal professional protecting your rights during the claim process. Our award winning legal team can help with every step of your claim, as well as help to appeal denied claims.

Have questions about your individual or group disability claim?

The taxability of disability benefits can be complex. If you are still struggling to receive your disability benefits or your claim has been denied, contact a top-rated disability attorney for help.

DarrasLaw is an award-winning and nationally pre-eminent litigation firm that specializes in short-term and long-term disability law and ERISA litigation. Our award-winning California disability attorneys and top-rated ERISA lawyers have over 100 years of combined litigation and claim experience in helping our clients timely file valid claims and fight wrongful delays, denials, and terminations of insurance coverage.

We know how to get the individual or group disability benefits you deserve, and we stand by our clients every step of the way. If you would like a completely free policy analysis and free claim consultation, Call us at (800) 898-7299 or email us for a free policy analysis and free claim consultation.