Is disability income taxable?
In the event that you become disabled and you begin receiving benefits payments, taxes on these payments depend on the type of disability insurance and whether premiums for that plan were paid with pre- or post-tax dollars.
You may not owe taxes on the benefits you receive if you have an individual disability insurance plan and are not part of an employer-sponsored plan. This is because under an individual plan, the premiums are likely paid with your post-tax dollars.
You will likely owe taxes on disability benefits if you pay insurance premiums using pre-tax money or your employer pays them for you.
To determine your tax status, consider the type of disability insurance you receive. There are four basic types:
- Employer-sponsored plans
- Individual plans
- Social Security disability
- VA disability compensation
Employer-sponsored plans: How are benefits of employer-sponsored plans taxed?
- Your employer pays the premiums: You owe taxes on the income you receive.
- You pay the premiums with after-tax dollars: You do not owe taxes on the income.
- You and your employer split the cost of premiums: When you receive income, the portion attributed to the employer-paid share of the premiums is taxable; the share you paid with after-tax dollars is tax-free.
Individual plans: How are individual plans taxed?
Insurance companies provide options to supplement employer-sponsored group coverage with an individual disability income insurance policy. Benefits are typically paid tax-free because the premiums are paid using after-tax income.
Social Security disability: Is Social Security disability taxable?
If your income from other sources together with your Social Security benefits exceeds a certain IRS threshold, a portion of your Social Security disability benefits may be taxable. Some states also tax these benefits.
VA disability compensation: Is VA disability compensation taxable?
VA disability benefits are income tax-free.