Your income allows you to plan and save for the future and achieve financial goals, whether they include securing a comfortable retirement, funding a child's education or maintaining your lifestyle.
However, unexpected life circumstances abruptly can halt that flow of earnings. If you can't work due to an illness or injury,
Because these benefits are a way of replacing your income, you may be curious if disability insurance is taxed like income, too. Here are the implications and how to consider them in your financial strategy.
Is disability insurance taxable?
The answer isn't straightforward. For disability insurance provided by a private insurer, it depends on how the premium was paid.
In general, when disability insurance is funded with pre-tax dollars, your disability benefit payouts will be taxable. This is typically the case with
However, for disability insurance you've obtained directly (not through an employer), you're paying the premiums using after-tax dollars, so the benefits are typically tax-free.
This is the case regardless of whether you have short-term coverage (for temporary disabilities) or long-term coverage (for long-lasting or permanent disabilities). Regardless of the length of your benefit period, how the insurance has been paid for—with pre- or post-tax dollars—is the deciding factor for taxability.
Ensuring your disability insurance benefits aren't taxed
You can maximize the likelihood that your disability insurance benefits will not be taxed in two ways:
- Know your payment structure. If you have an employer-sponsored plan, verify with your benefits administrator whether the premiums are paid for with pre- or post-tax dollars.
- Rely on your own disability insurance. If you're buying the insurance yourself, the benefits almost certainly will not be taxed as long as you're paying for it with after-tax dollars. Going outside an employer-sponsored plan also allows you to
customize your coverage with riders to fit your needs. Plus, you'll be able to keep your insurance regardless of where you work.
Reporting disability income on your tax returns
In any year that you receive taxable disability insurance benefits, you should get an IRS Form W-2 from the insurance company. This W-2 will show your gross benefits and any taxes withheld from them when they were paid to you. Use the form when filling out your federal, state and local income tax returns.
For general help figuring out if your benefits are taxable or how to report them, you can review
Private disability insurance vs. Social Security Disability Insurance
It's crucial to understand that the tax implications of
Most everyone who works pays SSDI premiums with a portion of the Social Security tax taken directly from their paycheck. The SSDI program provides benefits only for long-lasting or permanent disabilities that render you incapable of working.
The
This table shows how much you might pay for federal income tax on Social Security benefits.
Filing status | Combined income | % of benefits that may be subject to income tax |
Single | Under $25,000 | 0% |
| | $25,000-$34,000 | 50% |
| | More than $34,000 | 85% |
Married filing jointly | Under $32,000 | 0% |
| | $32,000-$44,000 | 50% |
| | More than $44,000 | 85% |
In any year you receive SSDI benefits, you should receive Form SSA-1099, which will help you determine whether any portion of your benefits is taxable.
Get professional guidance
The complexity of tax laws and your individual circumstances make personalized advice about the tax implications of
