If you have recently begun receiving any form of disability income, you’ve likely wondered if any income or disability benefits are taxable.

The answer of course depends on a variety of factors and your unique circumstances. Because there are so many different types of disability income, including Short Term Disability, Long Term Disability, disability insurance, and Social Security Disability Insurance, it can be confusing to understand which of these disability benefits are taxable. While federal rules take precedence, it’s also important to be aware that there can be state tax implications as well.

At Fields Law, we’ve helped our clients nationwide for more than 20 years navigate key issues like disability and plaintiff injury services. We’ve helped thousands of clients over the past two decades answer complex questions like “Is long term disability taxable?” and “Is Social Security Disability income taxable by the IRS?”.

So let’s get ready to dig in, there’s a lot to unpack about disability benefits and taxes!

Understanding the Basics of Disability Income

Disability income includes any of various types of payments that you may receive when you’re unable to work. Qualifying for disability income often hinges on the specific illness or injury sustained. Disability income or benefits can come from a variety of sources, and where that income comes from will go a long way in determining if your benefits are taxable.

So, let’s start at square one and look at the different types of disability income. These include:

• Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI): These are two types of federal disability income that are provided and regulated by the Social Security Administration (SSA). A common question we hear is, “Is Social Security Disability income taxable?”. We’ll dig deeper in a moment, but generally speaking SSI benefits are not taxable, while SSDI benefits aren’t always a simple “yes” or “no”.
• Employer-Sponsored Long Term Disability Insurance: Many employers include Long Term Disability insurance as part of their employee benefits package, but not all do. This can provide benefits from anywhere from 2 to 10 years. Whether Long Term Disability payments are taxable depends on who paid the premiums.
• Employer-Sponsored Short Term Disability Insurance: Short Term Disability insurance functions similarly to Long Term Disability insurance, but is meant for short term injuries that would allow the employee to return to work in a shorter time frame, typically from several months to less than a year. Whether or not short-term disability income is taxable by the IRS also depends on who paid the premiums.
• Private Disability Insurance Policies: If your employer does not provide Long Term Disability or Short Term Disability insurance, individuals can purchase their own private disability insurance. The tax rules on private disability insurance also depend on who paid the premiums.
• Department of Veterans Affairs (VA) Disability Benefits: Veterans disability benefits are beyond the scope of this blog, but are generally not subject to taxation.

Each of these forms of disability income have different regulations, which will determine if and how these payments are taxable. Understanding the source of your disability income is a crucial first step in determining its taxability.

Is Social Security Disability Income Taxable?

Now that we understand the sources of disability income, we can begin to answer the central question, “are disability benefits taxable?”

Let’s begin by answering a common question: “Is Social Security Disability income taxable by the IRS?”

It would be great if there were a simple answer to this question, but in reality the question depends on an individual’s specific circumstances. Essentially, whether you owe taxes on SSDI income or not comes down to one determining factor – your provisional income.

Understanding Provisional Income

Provisional income (PI) is how the IRS determines whether or not your Social Security benefits are taxable. Essentially, it is a floor set by the IRS that looks at your combined income including:

• Your adjusted gross income (AGI)
• Any tax-exempt interest you received
• One half of your total social security benefits for the year

If your combined provisional income falls below the appropriate threshold, then you will not owe taxes. If your provisional income exceeds the threshold, the remaining portion will be taxable.

To calculate PI, the IRS has established these specific income thresholds for common filing statuses:

• Individual Tax Payer (Single, Head of Household, etc): A combined provisional income of less than $25,000 would not pay any taxes on their Social Security benefits. A PI between $25,000-$34,000 would see up to 50% of benefits or 50% of provisional income above $25,000 taxable, whichever results in a lower taxable amount. If your PI is greater than $34,000, 85% of benefits or 85% of PI above $34,000 is taxable, whichever is less.
• Married Filing Jointly: For those who are married and filing jointly, the PI limit for paying zero taxes on your Social Security benefits is $32,000. If your PI is between $32,000-$44,000, 50% of your benefits or 50% of provisional income above $32,000 is taxable, whichever is less. If your PI is greater than $44,000, up to 85% of benefits or 85% of PI above $44,000 is taxable, whichever is less.
• Married Filing Separately: For married couples who choose to file separately, the taxability of your disability benefits depends on whether or not you lived with your spouse. If you lived with your spouse at any point during the last year, up to 85% of your benefits may be taxable if your provisional income is $0 or more. If you did not live with your spouse at any time during the tax year, the provisional income threshold for single tax payers apply. The reasoning is that the IRS seeks to limit the tax breaks for spouses who file separately, but still live together.

Let’s look at an example:

You are filing as a single tax payer and you received a total of $20,000 in SSDI benefits for the tax year. You also received $15,000 in adjusted gross income from other sources, and did not have any tax-exempt interest paid to you. Your provisional income would be calculated as:

$15,000 (AGI) + $0 (tax exempt interest) + $10,000 (Half of your SSDI) = $25,000 (Provisional income)

Based on a provisional income of $25,000, up to 50% of your SSDI benefits of $20,000 could be subject to taxation.

Supplemental Security Income: Generally Not Taxable

In addition to SSDI benefits, the Social Security Administration offers another disability income program called Supplemental Security Income (SSI). While SSI functions similarly to SSDI, it serves a different purpose.

SSI is a federal needs-based program which provides financial assistance to individuals with severe disabilities such as blindness, as well as aged individuals with limited income and resources.

Because SSI is a needs based program, rather than one based on prior history and contributions like traditional Social Security benefits, this income is not considered taxable by the federal government.

However, it is important to note that some states may have different tax rules regarding different types of income. While most states follow federal guidelines, it’s still crucial that you check your own state’s tax laws to be sure.

In addition, while SSI is not typically taxable, other income sources you may receive simultaneously may be subject to federal and state taxation.

Are Long Term Disability Payments Taxable?

We’ve discussed forms of federal disability benefits through Social Security programs, but are  Long Term Disability payments taxable?

This form of employer provided insurance typically comes down to one important factor: who paid the premiums for the disability insurance policy? Understanding the premium payment arrangement will determine if your long term disability payments are subject to taxation.

Let’s look at a few possible scenarios:

Scenario 1: 100% Employer Paid Premiums

If the Long Term Disability insurance was completely paid for by your employer, then any Long Term Disability benefits that are paid to you are taxable as ordinary income at the federal level. The IRS essentially views these payments as replacing your regular taxable income, since your employer’s contributions were not considered taxable income at the time they were made.

Scenario 2: 100% Employee Paid Premiums

If your Long Term Disability insurance was paid for entirely with your own money, after your income had already been taxed, then the IRS considers your Long Term Disability income not to be taxable. Because the premiums have already been paid for with income subject to tax, any further taxation of benefits would be considered double taxation, something the IRS tends to avoid in this case.

Scenario 3: Employee and Employer Shared the Cost of Premiums

In this case, the cost of Long Term Disability insurance premiums paid for by the employer’s contributions would be considered taxable, whereas any portions paid by you with after-tax dollars would not be taxable. Come tax season, you would need to know how much your employer’s contribution is, which you can check with your employer’s HR department.

Is Short Term Disability Income Taxable By IRS?

Similar to Long Term Disability income, the taxability of Short Term Disability income also depends on who paid the premiums for the policy. In short:

• Employer-Paid Premiums: If your employer paid 100% of the Short Term Disability premiums, then any Short Term Disability benefits you receive are taxable income.
• Employee-Paid Premiums: Likewise, if you paid 100% of premiums yourself, with already taxed dollars, the Short Term Disability benefits you receive are generally not taxable at the federal level.
• Shared Premiums: If any portion of the premium was split between employer and employee, the portion of disability benefits paid by your employer are considered taxable, and your portion is generally not taxable.

If you have any questions about whether your employer pays for Short Term Disability or Long Term Disability insurance, be sure to check with your HR department or benefits administrator for the most accurate information on who paid your premiums.

Is Private Disability Insurance Taxable?

Lastly, we can discuss the taxability of private disability insurance benefits.

Unlike Short Term Disability and Long Term Disability insurance that are received from an employee benefits package, private disability insurance policies are purchased directly by the individual from an insurance company.

Private disability insurance policies are designed to replace the policyholder’s income if they become disabled and unable to work. These policies serve as a safety net for their holders that is independent of any Short Term Disability or Long Term Disability insurance.

Because private disability insurance is purchased with after-tax dollars, any disability benefits you receive from these policies are not taxable at the federal level.

Essentially, the IRS considers this a return of funds that have already been taxed. Further taxation would be considered double taxation. While this is generally true, we do encourage you to consult with a tax professional to confirm the specific rules that apply to your state and personal situation.

Key Takeaways and Actionable Advice

Now that we’ve had a chance to look at each type of benefit, let’s wrap things up with a quick review. Whether or not your disability income is taxable is determined by the type of disability income and who paid for it.

• Social Security Disability Insurance (SSDI): Depending on your total provisional income, as calculated by the IRS’ formula, a portion of your SSDI benefits may be taxable. Your filing status will also factor in here.
• Supplemental Security Income (SSI): Generally not taxable at the federal level.
• Long Term Disability and Short Term Disability Insurance: Taxability is determined by who paid the premium. If it was your employer, your disability income is subject to taxation; if you paid the premium, your disability income is generally not taxable. Shared premiums are taxed proportionally to your employer’s contributions.
• Private Disability Insurance: These benefits are generally not taxable because the premiums are paid with money that has already been taxed.

Actionable Advice on Disability Benefit Taxation

1. Know your coverage, and where it comes from.
2. Keep records of any premiums that you have paid yourself.
3. If you receive SSDI, understanding how to calculate your provisional income is key to determining your tax liability.
4. Tax laws can vary by state, and just because you don’t owe taxes federally doesn’t mean you won’t owe at the state level. Always consult with a professional for tax advice specific to your situation.

Fields Law: Here to Help You Navigate the Disability Process

Determining your tax obligations when you’re already dealing with health issues that have taken you out of the workforce is challenging. The key is understanding what type of benefits you have received, and your contribution to any insurance. Understanding these key aspects of where your disability benefits come from will prepare you properly come tax season.

Fields Law is your trusted nationwide injury and disability lawyer. If you or a loved one is facing challenges obtaining disability benefits, Workers’ Compensation, or Personal Injury – or if you have questions about the types of disability benefits discussed in this blog – contact Fields Law.  We can help.

For more than 20 years, Fields Law has helped thousands of clients nationwide through the disability application and appeal process. Our team of experienced legal professionals are here to answer your questions, and provide you with compassionate, and knowledgeable advice and assistance.

Contact Fields Law today for a free case review and consultation. It doesn’t cost anything to get your questions answered – even if you’ve already been denied, we can help!

*DISCLAIMER*

This blog post provides general information regarding the taxability of disability income and should not be considered tax advice. Tax laws are subject to change, and individual financial situations can vary significantly. For personalized guidance on your specific tax obligations, it is essential to consult with a qualified tax professional or financial advisor.