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Is disability insurance taxable?

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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, disability insurance can act as a financial safety net, helping you continue to support your family.

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 employer-sponsored (group) plans, where you pay the premium directly from your paycheck before taxes are taken out or your employer pays the premiums on your behalf. In both situations, you haven't yet paid taxes on the money, so the benefit is likely to be taxable.

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.

Learn more about short-term vs. long-term disability insurance

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:

  1. 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. 
  2. 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 IRS Publication 525, Taxable and Nontaxable Income and IRS Publication 907, Tax Highlights for Persons with Disabilities. You also may want to consult with a tax professional in addition to your financial advisor for personalized advice that's tailored to your situation.

Private disability insurance vs. Social Security Disability Insurance

It's crucial to understand that the tax implications of Social Security Disability Insurance (SSDI) differ significantly from the taxability of benefits paid by a private insurer.

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 taxability of SSDI benefits depends on your taxpayer filing status and your combined income for the year. Your combined income includes your adjusted gross income plus any non-taxable interest income you received, plus half of any Social Security benefits you received.

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


Under $25,000




More than $34,000


Married filing jointly

Under $32,000




More than $44,000


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 disability insurance invaluable. Consider working with your tax professional as well as a Thrivent financial advisor for guidance on disability insurance coverage tailored to your specific situation, including how disability benefits fit into your overall financial strategy.

Disability income insurance contracts have exclusions, limitations, reductions of benefits and terms under which the contract may be continued in force or discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.