If you are in the process of seeking long-term disability insurance or are getting ready to collect long-term disability insurance after a challenging appeal, you may be wondering “Is long-term disability taxable?”.
When figuring out the taxability on your long-term disability, it all depends on the type of benefits you are receiving.
You will also take into consideration whether your premiums were paid with pre-tax or after-tax money and whether you or your employer paid the premiums.
Let’s briefly look at each type of insurance and whether they can be taxed or not.
(note – make sure to go over all this with a tax professional – they can better advise you in this area)
Individual Long-term Disability Insurance
Individual long-term disability insurance differs from group insurance you may receive through your employer. Individual insurance does not have the same regulations, ERISA for instance, and there are a lot of different policy types and coverage. Some policies may be paid for through pre-tax $ and while others might “after-tax” $. Again, work with a tax planning professional on this to ensure you don’t make an accidental mistake.
If your premiums are paid by your employer with before-tax dollars, your benefits then become taxable. If your premiums are paid with after-tax dollars, either by your or your employer, then your benefits are not taxable. To have your premiums paid with after-tax dollars, you may have to request that from your employer before your policy begins. If your premiums are paid partially by your employer with before-tax dollars and partially by you with after-tax dollars, then you will be taxed for the portion paid by your employer.
Group Association Insurance
Group association, long-term disability insurance, is called a group policy. Employees are offered special terms, conditions, and rates due to the characteristics of that group. Group policies are similar to individual policies and are taxed similarly. If you pay the premiums, then you will receive the benefits tax-free.
Should You Use Pre-tax or After-Tax Dollars
Deciding how to pay your premiums is going to be a difficult decision. If you choose to pay with pre-tax dollars, it will decrease the amount of income tax you will be paying from your paycheck. However, if you need to collect long-term disability benefits, you will be taxed on them.
If you choose to pay with after-tax dollars, it will decrease your take-home pay, but if you have to collect long-term disability benefits, then you will not be taxed on them.
For more information Is Long-term Disability Taxable you can visit here.