Monday, April 6, 2015

Are Long Term Disability Insurance Benefits Taxable?

Its tax season once again!  One of my least favorite times of the year.  During this time, I am often asked whether LTD benefits are taxable.  The answer to this questions depends greatly on who paid for the disability insurance premiums, you or your employer.  The answer also depends on whether the premiums were paid with pre-tax or after tax income.
If your employer paid for 100% of your disability insurance premiums and did not include the amount paid as your gross income, then your long term disability payments are taxable.  Moreover, if your employer paid you directly while you were disabled, these payments are also taxable.
If your employer paid a percentage of your premium and you were responsible for paying the remaining percentage, then you won't have to pay taxes for the amount of benefits that equals the percentage that you paid.  Here is an example on how you will be taxed under this scenario:
Pete pays $40 dollars a month for his LTD policy and his employer pays another $40 per month for this insurance.  Pete becomes disabled and starts receiving $4,000 a month in LTD benefits.  Since he paid 50% of the premiums he is responsible for paying taxes for half of his monthly payments ($2,000).  The other $2,000 is tax free.
As a general rule, expect short term disability payments paid by a self-funded plan to be taxable.  On the other hand, you can also expect benefits froma non-ERISA policy purchased individually to be tax free.  However, please note that different rules might apply to each particular scenario.  This post is intended for general information purposes and should not be construed as tax advise.  As I have said many times in previous posts, I am a disability benefits attorney, not a tax lawyer.  Moreover, I am not an accountant, CPA or tax preparer.  Please consult a tax professional before filing taxes or making any decisions with respect to your particular case.