Long Term Disability Insurance and Taxes
If you have Long Term Disability insurance, you may be wondering how it will affect your taxes. Depending on how your plan is paid for, you may need to pay taxes on any benefits you have received.
Are benefits taxable?
It depends on who paid the premiums for the policy and whether post- or pre- taxed incomed was used. If you paid for the entire cost of the policy (with post-tax dollars), then the benefits are generally not considered taxable. You pay the premium on your own, and the benefits are yours tax-free. However, benefits often do count as income if an employer paid for the plan you are receiving benefits through, unless the cost of the premium is reported as income to you.
Sometimes a cafeteria plan will allow you a choice to purchase coverage with pre or post tax dollars. If you choose to pay your premiums with pre-tax dollars you will save money in the short-term on premiums, but if you need your benefits they will be taxed. If you are a young, healthy individual in a low-risk profession, it may make sense to choose this option. However, if you think there is a good chance you may need benefits, you will want to use after-tax dollars in order to prevent your benefits from being taxed. Keep in mind that disability insurance pay outs are typically significantly less than salary. If something unfortunate happens and you do need benefits, you will want to be able to take home the full benefit amount.
If your benefits are taxable, your insurer is required to provide information regarding the dollar amount of benefits paid and taxes automatically withheld.
|Who Paid the Premium?||Will you owe tax on the benefits?|
|You (Post-tax dollars)||No.|
|Employer||Yes, Benefits are considered income.|
|25% You (Post-Tax), 75% Employer||You will owe tax on 75% of benefits.|
|You (Pre-tax dollars)||Yes, you received a deduction for the premium payment.|
Taxes can be confusing. If you need additional guidance, a tax professional will be able to help you.
If you have a Long Term Disability insurance policy, it should be there for you when you need it. Long Term Disability insurance providers often deny legitimate claims. If you have a Long Term Disability insurance policy, and have been denied coverage, the attorneys at Bemis, Roach and Reed can help. Contact us today for a free consultation.
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