One of the things you’ll deal with as you begin receiving long term disability income is the difference when you file your tax return. Is it considered taxable income, or not? You may have heard conflicting or confusing advice on the subject. The basic answer is, it depends. We’ll explain the difference.
How Did You Pay Your Premiums?
You may have paid your premiums out of your paycheck, separately from your employer, or your employer may have paid it. Or you may have paid part of the premiums, while your employer paid the rest of it. How the premiums were paid makes a big difference.
If you have an individual policy and used after-tax dollars to pay for your LTD premiums, you’ve already paid taxes on the money, so your long term disability income payments are tax-free. However, you can’t deduct the payments as a medical expense like you would with health insurance.
Using pre-tax dollars to pay your individual LTD premiums reduces your taxable income until you begin receiving payments. Once you do, your LTD payment becomes a “taxable income,” because you saved taxes earlier. Therefore, you’ll have to pay taxes on the payments.
If you purchase a group policy through an association, the policies are similar to individual policies, but you can’t deduct the premiums. The tax ramifications are generally the same as the individual policies, and the benefits are tax-free.
Employer-Sponsored/Paid Premiums
The rules are a little different when you are under an employer-paid policy.
When your employer pays all of your premiums but doesn’t include it in your gross income, your long term disability income payments will be taxable.
If you pay part of your premiums, the tax liability will be shared. The same rules apply for pre-tax and after-tax dollars for the portion that you pay for yourself.
If your employer offers a so-called “cafeteria plan,” where you can choose disability as well as other insurance benefits, they’re normally paid on a pre-tax basis. In some cases, the employer for some benefits up to a certain limit. After that, you pay for additional benefits you choose over and above the set limit. These additional benefits can be paid pre-tax or after-tax.
Should you chose to pay with after-tax dollars, that part of your income will be considered tax-free, but you will be taxed on the employer-paid portion. If you pay with pre-tax dollars, you’ll be taxed on both your portion and the employer-paid portion.
Should You Use Pre-Tax Or After-Tax Dollars?
There are benefits to both methods. One way or the other, you still pay taxes on LTD income.
If you never need to file an LTD claim for benefits, you’ll save money on taxes by paying with pre-tax dollars. But if there’s a chance you’ll be filing a claim for disability, you may be better off using after-tax dollars. You’ve already paid taxes on the money you used, so your benefits will be tax-free.
How you pay for your LTD policy is a personal decision. The IRS offers some information on its website. Discussing your options with a tax professional can help you decide which method is right for you.
Your Houston Long Term Disability Attorney
We’ve helped over 4,000 Houstonians have received their LTD benefits. Need help? The Herren Law Firm can help you with your application, appeals and help you through the process, and give you one less thing to worry about. Contact us today at 713-682-8194 (or use our online contact form) to schedule your free consultation. There’s no obligation and no up-front fees. We only collect if we win your case.
