Long Term Disability – Taxable?

Michael Lodge

by Michael Lodge

Each tax season we have clients that receive long term disability payments.  The question from the clients if this is taxable income.  Let’s give you a qualified IRS tax answer to this question.

Question: Is the long-term disability I am receiving considered taxable?

Answer:

You must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer:

  • If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.
  • If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.
  • If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and you did not include the amount of the premium as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
  • If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, to the insurance company, or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.

Amounts you receive from your employer while you are sick or injured are part of your salary or wages.

  • Report the amount you receive on the line “Wages, salaries, …” on Form 1040, Form 1040A, U.S. Individual Income Tax Return, or Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents.
  • You must include in your income sick pay from any of the following:
    • A welfare fund
    • A state sickness or disability fund
    • An association of employers or employees
    • An insurance company, if your employer paid for the plan

You can generally exclude from income payments you receive from qualified long-term care insurance contracts as reimbursement of medical expenses received for personal injury or sickness under an accident and health insurance contract. Also, you can exclude from income certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits). Refer to Publication 907, Tax Highlights for Persons with Disabilities.

You may be able to deduct your out-of-pocket expenses for medical care above any reimbursements, if you are eligible to itemize your deductions. You will need to review Publication 502, Medical and Dental Expenses.

If you have further questions on this topic please submit them to:  tax@icontaxgroup.com