Are Short and Long Term Disability Benefits Taxable?
By: Janet Ambrose
When it comes to short and long-term disability benefits, there are a lot of gray areas regarding what the Internal Revenue Service considers as taxable income. As each circumstance is different and laws vary from state to state on disability insurance premiums and payments, information provided here is general in nature and is not meant as a substitute for professional tax advice for your particular circumstances. One big question being asked; is disability income taxable?
To determine whether or not your short or long-term disability benefits are taxable, you need to review first how the premiums were paid. Review your disability insurance premiums and ascertain whether or not the benefits you receive come from an employer-paid plan or a private plan in which you were the sole contributor.
So, is disability income taxable? Under the laws of the Internal Revenue Service, short and long-term disability benefits are not taxable so long as the payments come from a private carrier and were made by you, not your employer. Supplemental Security Income (SSI) payments are not taxable under IRS regulations.
When you receive long-term disability retirement benefits before the age of retirement, the IRS may consider these amounts taxable. For instance, if you received state disability insurance benefits in substitution for unemployment insurance benefits, then your SDI benefits are taxable under federal guidelines. Once you reach full retirement age, then your long-term disability retirement income is not considered taxable—the IRS refers to it as a pension and does not include it in the "earned income" category.
If you are receiving disability retirement benefits and are not at retirement age, however, IRS considers this as earned income and taxable until you reach the minimum retirement age, unless the premium payments were made by you and not your employer with after-tax dollars.
If you receive other income in addition to your disability benefits, you need to determine if your benefits are taxable by reviewing the structure the IRS has set up for taxation purposes. When you file as an individual and your total income runs from $25,000 to $34,000, you may be required to pay taxes on up to 50 percent of your benefits. If your income is greater than that, the percentage is increased.
For those married and filing a joint return and the combined incomes ranges from $32,000 to $44,000, you may be responsible for taxes on 50 percent of your benefits. That percentage owed on taxes increases as you pass $44,000 in yearly income.
- New York—Union disability payments are considered taxable in New York.
- SDI Premiums—California provides a state-sponsored SDI program to California employees.
To reiterate, the critical factors in determining whether your disability payments are taxable is first to ascertain whether or not you received an early disability retirement; the payments came from an employer-sponsored plan or whether you received disability payments in lieu of unemployment payments. When you are receiving payments from a disability program that are considered taxable, the entity providing you the payments must report these payments to the federal government and you on the appropriate 1099 form. It will provide the taxable amount in the correct box that must be added to your annual tax filing at the appropriate time.
Another critical factor in determining if your disability payments are taxable stems from how you paid the premiums on your disability program through your work. If you paid your disability premiums from pre-tax plans, then your payments are taxable under IRS regulations, because you did not pay any taxes on the money used to pay the disability premiums. If you paid the premium with after-tax dollars from your paycheck, then you are not liable for taxes on the income you receive from the disability program.
The IRS provides guides and information as to what it considers pre-tax, after-tax, disability payments and standards for determining if the income is considered taxable. As with these kinds of scenarios, it is advised that you meet with a certified tax professional or a licensed and certified public accountant (CPA) within the state in which you live. CPAs are allowed to provide accounting services in the state in which they received their certification—as the laws are different from state to state. When working with a tax professional, it is important to confirm their certification or license is legitimate and up-to-date. For more information on short and long-term disability programs and taxes, review any one of the links below.