Working with long term disability (LTD) can be baffling, and adding tax considerations into the mix won’t make it any easier. Long term disability is necessary for people who are unable to work for an extended period of time due to a disability. However, are these financial benefits taxable? This blog will go over key information on long term disability and whether or not it is taxable.
Is Long Term Disability Taxable?
First things first: is long term disability taxable? While we would all like a straightforward answer to this question, the answer is that it depends. Long term disability can be taxable or non-taxable. Several different factors play with the end result, and this could include:
- Whether you’re part of a group policy or private policy
- Whether you pay premiums with pre or post-tax dollars
- The percentage of how much premiums you pay within your policy
Is Long Term Disability Taxable if You Have a Private Long-Term Disability Policy?
Private long term disability is a policy that people pay for individually, outside of their employment. This means that you’re paying for the entire premium yourself. Whether your benefits are taxable depends on whether you pay the premiums with pre-tax or post- tax funds.
- Pre-Tax Dollars – or before tax, dollars, is when a payment is made and has not been taxed yet.
- Post-Tax Dollars – or after tax dollars, is a payment that includes withheld tax dollars. This means that you won’t have to pay for it later.
If your long term disability premiums are paid with pre-tax dollars, you will most likely have to pay taxes on your long term disability benefits. If your long term disability premiums are paid with post-tax dollars, your benefits will most likely not be taxable. Typically, private policy premiums are paid with post-tax dollars, but it all comes down to the claimant’s decision in the end. Most people select the post-tax option so that when they receive their long term disability benefits, the taxes will already have been paid and they will not have to worry about paying anything later.
Is Long Term Disability Taxable if You’re Part of a Group Long Term Disability Policy?
Group long term disability is a policy that you get through your employer. If your employer pays the full premium for your long term disability insurance, then your benefits will likely be taxable. This means that while your employer is paying the premiums for your long term disability insurance, you will have to pay income taxes on the benefits.
At times, your long-term disability insurance premiums can be split between you and your employer. In cases like these, at least a portion of your benefits will be taxable. The percentage that is paid by your employer will generally be taxable, while your percentage will depend on whether you pay your share of premiums with pre or post-tax dollars. While it’s highly likely that the employer-paid portion is taxable, this also takes into account whether the employer is paying with pre or post-tax dollars.
Is Long Term Disability Taxable if You Accept a Long Term Disability Lump Sum Settlement?
You might get offered a lump sum settlement for your long term disability benefits rather than intermittent payments. This means that you would receive your entire disability benefit in one payment. In cases like these, whether your lump sum is taxable depends again on whether you pay with pre or post-tax dollars. If it is, you’ll, unfortunately, see your sum total reduced significantly by taxes.
Is Long Term Disability Insurance Tax Deductible?
Long term disability cannot be deducted from your personal income taxes. Many people often confuse it with medical insurance, which is tax-deductible. Long term disability premiums are not considered a medical expense by the IRS, so tax deductions are not possible.
Example: If Peter pays with post-tax dollars, the premiums have already been taxed up front, so the payments cannot be claimed again. Any of Peter’s premiums paid with pre-tax dollars must be filed as income.
It Comes Down to Whether Premiums are Paid with Pre or Post-Tax Dollars
For the most part, whether you pay long term disability benefit premiums with pre-tax dollars or post-tax dollars is mainly what determines if your benefits will be taxable. That’s why it’s important that you be aware of the following:
- How you are making your payments
- Your plan’s policy
- What portions of the payment you are responsible for
If your long term disability benefits are taxable, there are some tax forms that you can submit to your insurance company that enables them to withhold taxes from your monthly disability benefits. This will keep you from owing taxes later. We hope this blog helps you determine whether your long term disability insurance is taxable or not. At Bonnici Law Group, our attorney can help you secure your long term disability claim. Whether you want to file for long term disability or have a few tax questions on the topic, we can help! Give us a call at (619) 259-5199 or click here for a free consultation.