Income from invalidity insurance may or may not be taxable. Taxation of invalidity insurance benefits depends on the type of benefits you receive, whether contributions were paid before or after tax, and who paid the contributions (you or your employer). Are disability insurance payments taxable?
What is invalidity insurance?
Disability insurance is a type of insurance providing income in the event that an employee is unable to perform tasks at work due to injury or disability. Disability insurance is divided into two categories:
- Short-term disability: this type of insurance pays part of your income for a short period – and can last from several months to two years.
- Long-term disability: this type of insurance starts after a waiting period of several weeks or months – and can last from several years to retirement age.
Disability insurance can come from various sources. Disability insurance can be provided by your employer or something you buy from an insurance company.
Individual disability insurance
The rules for taxing individual invalidity insurance benefits are basically simple. Because you pay contributions in dollars after tax, the benefits you receive are tax-free. However, unlike health insurance premiums, you cannot deduct the premiums paid for individual invalidity insurance as medical costs.
Sometimes your employer pays for an individual disability insurance policy. This can happen if you are considered a key employee of the company. If so, other policies may apply. If an employer receives a benefit, then the contribution cannot be deducted from the company and the benefits are not taxable when the company receives it.
Minimizing taxes on disability income
There are steps you can take to make sure you don’t pay more tax than your disability income. In most cases, you can ask the insurer to deduct income tax on your benefits, as if your employer would have a tax on your wages if you were still employed. You can also make quarterly tax payments on your taxable income. Prepaying some taxes helps to avoid delays, interest and penalties if you can’t pay taxes within the required time.
Taxation of income from incapacity for work under social security
SSI payments are not taxable. SSDI benefits, like other social security income, must be reported on your tax return. Whether you pay tax on these benefits depends on your total income and benefits in a given year.