Disability Insurance: Making Sure the Income Stream Doesn't Run Dry

Will Your Disability Benefits Be Taxable?

Both short- and long-term disability benefits are taxable to varying degrees, depending on the type of policy. Here are the rules under current law:

  • Your short-term disability benefits are taxable or tax-free depending upon how the plan premiums are paid. States with statutory short-term disability plans have special rules.
  • The portion of LTD benefits you receive that is paid by an employer is taxable to you. Federal, state, and local taxes are withheld; Social Security and unemployment taxes are excluded.
  • The portion of LTD benefits you receive that is paid by you is tax-free, except if you pay with pre-tax dollars.

If you are an employee, self-employed, a partner in a partnership, or owner of a corporation and own an individual disability income policy, it's a good idea to check with your tax professional to determine whether your benefits are taxable. Also refer to the chart below to determine if your LTD benefits are taxable.

Individual Disability Policies: Are Your Long-Term Disability Benefits Taxable?

Who Pays the Premiums?

Benefits Are Payable to Whom?

Who Owns the Policy?

Are the Premiums Tax Deductible?

Are the Benefits Tax-Free or Taxable?

Individual

Individual

Individual

No

Tax-Free

Individual

Individual

Individual

Yes

Taxable

Employer

Individual

Individual

No

Taxable

Self-employed (sole proprietor)

Sole Proprietor

Sole Proprietor

No

Tax-Free

Partnership

Partner

Partner

No

Tax-Free

Partnership

Partnership

Partnership

No

Tax-Free

Corporation

Corporation

Corporation

No

Tax-Free

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