Tax Planning Tips for Disability Insurance

Note: The content on this page is intended for informational purposes only. We recommend that you consult a tax attorney for legal advice and to provide counsel for your specific financial situation.

Disability insurance benefits can be a great help when you are injured, but tax laws surrounding these payments can get a little tricky. In order to understand what your tax planning should be concerning your disability insurance income, you’ll need to evaluate what type of benefits you are receiving, whether the premiums are paid with pre- or after-tax dollars, and who exactly is paying the premiums: you or your employer.

Individual Disability Insurance Income

The premiums on these types of policies are usually paid with after-tax dollars and therefore the benefits you receive from them are considered tax-free. However, you should not confuse individual disability insurance premiums with a medical expense. It is not a medical expense and cannot be deducted as such.

Employer-Sponsored Group Disability Insurance

An employer-sponsored program can be a little more complicated. If you are enrolled in an employer group-sponsored program, then your disability payouts are only considered tax-free if you paid all of your own premiums with after-tax dollars, though it may depend on the policy itself and the reason and method of the payout. Some plans allow for the tax-free payout if it is paid with after-tax dollars, so be sure to check with your provider.

Benefits Under an Employer-Sponsored Plan

When employers offer their employees the option to pay for certain insurance plans with pre-tax dollars, it is important to remember that any payouts that result from a disability insurance plan will be considered taxable, should the employee make a claim on that disability policy. However, there are certain tax credits that may apply to individuals who are permanently disabled and receiving disability insurance payouts, though there are certain exceptions to this, so be sure to see what your particular plan allows for.

Group Association Disability Insurance

If you purchase disability insurance through a group or association, you may receive certain discounts or group rates due to the nature of the group plan. The premiums on these types of policies are usually paid with after-tax dollars and therefore the benefits you receive from them will typically be considered tax-free.

Should You Buy Disability Coverage With Pre-Tax or After Tax Dollars?

This question should be carefully considered because both options benefit you at different points in your life. If you choose to pay disability insurance premiums with pre-tax dollars, then it reduces your taxable income for that year, which is beneficial. However, at whatever point you begin to claim disability benefit payments, these payments will then possibly be taxable. If you pay for your policy with after-tax dollars, then should you ever claim the benefits you will likely not need to pay taxes on the payments, though certain exceptions apply.

To learn more about Disability Insurance and find the plan that’s right for you, visit the FICPA sponsored CPA Insurance Marketplace today.

Note: The content on this page is intended for informational purposes only. We recommend that you consult a tax attorney for legal advice and to provide counsel for your specific financial situation.