One of the less-discussed parts of getting disability benefits is what happens when it becomes tax time. Do you pay taxes on these benefits? The answer depends on what type of benefits you receive, and how you receive them.
Long Term Disability Insurance
Taxes on LTD insurance comes down to one question: who paid for it?
If your disability benefits come from a policy you paid for with after-tax dollars, as a rule, your benefits are tax-free.
However, if your employer paid for the policy, and does not include the cost of the policy in your gross income, the benefits are taxable, as it would be if you were earning an income.
If you shared the cost of the premium with your employer, you will share the tax benefits as well. The part that you paid (with after tax dollars) for will be tax free, but the portion your employer paid for will be taxable.
Should you retire from your job on disability, lump-sum payments for accrued time (such as vacation) are not part of a disability package. It is taxable, and should be listed as income.
The IRS also offers additional information on their website.
Disability Benefits From Social Security—SSDI And SSI
SSDI can be subjected to income tax, depending on what other income you may have (such as a spouse’s income.) However, many recipients don’t have much in the way of income, and do not end up paying taxes.
Under Social Security, you would receive one of two types of income:
- Social Security Disability Insurance, or SSDI, which is based on your working history and funded through payroll taxes
- Supplemental Security Income, or SSI, a need-based program which is awarded to low-income individuals, or individuals who haven’t earned enough work credits to qualify for SSDI. SSI benefits are not taxed.
They are both separate and distinct programs administered by the Social Security Administration.
As an individual, if your annual income is less than $25,000, you would not pay any income tax. If your annual income is from $25,000 to $34,000, your SSDI benefits would be taxed at 50%. If your monthly income exceeds $2,834, and your annual income exceeds $25,000, your SSDI would be taxed at 85%.
Married couples have a similar taxation schema, with up to 32,000 untaxed, up to $44,000 at 50%, and over $44,000 at 85%.
- “Back pay” of benefits—if you receive a lump sum of money for the previous months of benefits since your application date, you may be taxed at a higher rate because of it. However, with the help of a CPA or other tax professional, you can amend your previous tax returns to include the back pay money so that you are not taxed as heavily on your current year’s tax return.
Some states tax SSDI benefits, but Texas does not.
VA Disability Benefits
While military retirement pay may considered taxable income (if it’s based on age or length of service), military and/or VA disability benefit payment resulting from service-connected illness or injury is not.
Other veterans benefits paid to you or your family are also not taxable (from Military.com):
- Education, training, and subsistence allowances
- Disability compensation and pension payments for disabilities paid either to veterans or their families
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for veterans who lose their sight or use of their limbs
- Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death
- Interest on insurance dividends left on deposit with the VA
- Benefits under a dependent-care assistance program
- The death gratuitypaid to a survivor of a member of the Armed Forces who died after Sep. 10, 2001
- Payments made under the compensated work therapy program
- Any bonus payment by a state or political subdivision because of service in a combat zone
The IRS publishes a guide specifically for military members to help with tax preparation, as well as one on taxable and nontaxable income. Additionally, the IRS can assist you with tax preparation if you need it.
Other Nontaxable Benefits
These types of benefits are also non-taxable:
- Payments for blindness and other benefit payments from a public welfare fund
- Workers’ compensation for occupational injury or illness if it’s paid under a workers’ compensation act or similar law
- Compensatory damages for physical injury or physical sickness (punitive damages are taxable, however)
- Disability benefits under a “no-fault” auto insurance policy for income loss or earning capacity as a result of injuries
- Compensation for permanent disfigurement or the permanent loss or loss of use of a part or function of your body
If you have any questions about what is taxable or nontaxable, consult with your tax professional, or with a disability attorney.
Have Questions On Disability? Herren Law Can 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.
