For anyone who has experienced a long-term disability that caused them to miss work, long-term disability insurance payments can be a lifeline. The payments enable you to keep paying bills even if you're out of work for months. But you should know whether you need to pay taxes on that income. Is long-term disability taxable?
The primary factor in determining whether you must pay taxes is who paid the premiums on the insurance policy — you or your employer. The IRS explains that when your employer paid the premiums, long-term disability payments are taxable. But if you paid any or all the premiums yourself, the corresponding disability income isn't taxable.
Why is my long-term disability not taxable?
Certain types of long-term disability income aren't taxable income in the eyes of the government. If you pay all the premiums on your own long-term disability policy, any income you receive doesn't need to be reported on your tax returns. Sick leave pay is taxed the same way (taxable if employer paid for a policy, not taxable if you paid for it).
It's also possible that you shared the cost of disability premiums with your employer. In that case, the same rule applies. Only report the income due to your employer's payments on your taxes, and leave out income due to what you paid into the policy.
The IRS says that you "generally exclude" income 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." Some payments from a life insurance contract on a terminally or chronically ill person aren't taxable either.
What are the different types of disability coverage?
Short-term disability can include illness or injury unrelated to your job. Long-term disability plans may have more variation. Some LTD plans may focus on an "any-occupation" definition of disability (you have to be unable to do any work you're normally qualified for), while others look at "own-occupation" which means you only need to be unable to do your current job to qualify.
Will I get a W-2 for long-term disability income?
Remember that the income from a policy paid for by your employer is taxable, so here's what you need to do. Income received from your employer while you're sick or injured counts as regular wages, which are included on Form W-2, box 1.
You can complete Form W-4S and give it to the third-party payer of your disability insurance or sick pay if you'd like them to withhold federal income taxes from your payments.
Is long-term disability insurance tax-deductible?
If you pay premiums for a long-term disability insurance policy, you may wonder if those payments can be deducted from your taxable income. Those disability insurance premiums aren't tax-deductible (even if you are self-employed).
However, you may be able to deduct certain dental, vision, and medical expenses if the total you spent in one year is over 7.5 percent of your adjusted gross income. As PolicyGenius explains, to deduct these costs, you have to itemize deductions and claim the medical expense deduction.
Is long-term disability taxable if you accept a long-term disability lump sum settlement?
In some cases, you might take a lump sum payment for your long-term disability, rather than payments at regular intervals. Whether you paid with pre-tax or post-tax dollars can determine whether this is taxable. Keep in mind that a lump sum could be taxed enough to significantly reduce the payout.