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What Are the Tax Ramifications of Receiving Long-Term Disability Benefits?

What Are the Tax Ramifications of Receiving Long-Term Disability Benefits?

When you are pursuing a claim for long-term disability (LTD) benefits, you may not stop and consider the tax consequences of receiving those benefits. As disability plans vary widely, the tax consequences of any LTD benefits that you receive also may differ according to your plan.

When you enroll in a LTD insurance plan, you may be required to or have the option of paying the premiums with either pre-tax dollars or post-tax dollars. This distinction has a direct effect on the tax ramifications of any LTD benefits that you receive in the future.

If you paid for the premiums with pre-tax dollars, it is likely that your employer deducted your premiums from your wages or salary prior to deducting federal, state, and local taxes. As a result, when you receive LTD benefits, they will be subject to tax, which means that your overall benefits, which typically only are a percentage of your pre-disability wages to begin with, will further decrease. Therefore, you need to take the costs of taxes into account when budgeting for the receipt of LTD benefits.

On the other hand, if you pay for the LTD insurance policy premiums with post-tax dollars, you will not pay tax on any benefits that you later receive. Therefore, you will receive the full amount of the benefits to which you are entitled.

That being said, recent new tax provisions can have different effects on how certain funds (if received as a settlement, or as reinstated benefits) are taxed. As the new tax laws evolve, we will continue to learn more and know how to apply types of benefits to taxable income.

Other tax consequences may result if you end up agreeing to take a buy-out of LTD benefits from your insurance company, which is a lump sum of money that you would receive all at once. After receiving the lump sum, you no longer would be entitled to any further LTD benefits. As this situation can be complex, you should consult a tax professional about the tax consequences prior to taking a buyout.

Bonnici Law Group has the experience and knowledge that you need as you seek compensation for your injuries and struggle to recover from them, both physically and emotionally. We know how to help you create and maintain a strong claim for relief supported by the evidence and obtain the best outcome possible in your case. Do not hesitate to contact Bonnici Law Group at 619-259-5199 or help@bonnicilawgroup.com.

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