Learn how disability insurance works

Is Disability Insurance Income Taxable?

Filed under: Disability Insurance — Alston @ 8:34 pm February 4, 2011

People often question whether benefits or income from insurance claims is or should be taxable. The answer to the question of whether income from a disability insurance policy is taxable is based on whether the money used to pay for the policy was taxed or not.

As a general rule if premiums are paid with post-tax dollars income from the insurance product is not taxable. This means that for most situations if an individual paid the premiums for their disability insurance plan any payment received when you have a claim will not be taxable even if they receive income from their policy year after year.

If the company you work for paid your disability insurance premiums, chances are they paid them with pre-tax dollars. In this case, since neither the federal government nor the state received money on the front end it will take will expect to be receiving their cut on the back end. Your benefits will be taxable if your employer paid your disability insurance premiums.

An apparent exception to this can be a situation where you paid the premiums each pay period via payroll deduction. Although the company you work for will cut the check for your premiums, they will do so with money they took from you on a post-tax basis.

Exceptions to this exception are situations where premiums are paid with money taken from your paycheck via payroll deduction on a pre-tax basis. Payroll deduction can sometimes be on a pre-tax basis. (If the amounts deducted from your pay reduces the amount enter as your adjusted gross income for the tax year, the money was deducted on a pre-tax basis.)

Your tax situation may not be covered by this general rule. You should seek expert tax advice before acting on anything in this blog post. However in most cases disability insurance income is taxable if the premiums for the plan were paid with pre-tax dollars and disability insurance income payments are not taxable if the plan’s premiums were paid with post-tax dollars.

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