How taxes work with disability income insurance

If you have ever lost the ability to work due to a disabling condition before reaching retirement age, you may be eligible to receive disability income from your disability insurance. People who are young and healthy might not think this is much of a concern to them, but the reality is that 1 in 4 people in their 20s can lose at least a year of work due to a disabling condition. One question people have when considering disability insurance is how disability income is taxed.

How taxes work on disability income depends on the type of disability insurance policy you have, who pays for the policy and if you are withdrawing from Social Security. 

Understanding disability insurance

Disability insurance covers you in the event that you are unable to perform your job duties as defined in the insurance policy due to injury or disability. Disability insurance can be viewed in two categories: 

1. Short-term disability — This is disability insurance that covers a portion of your income over a short period of time, ranging from a few months to a couple of years.
   
2. Long-term disability — This disability insurance covers a portion of your income for a few years up until retirement age, usually age 65.
   

Your benefits are not taxable if you paid your premiums with post-tax dollars. This includes plans you purchased yourself as well as employer-sponsored plans you contributed to with after-tax dollars. This applies to both short-term and long-term policies. Many people look for a way to pay with pretax or deductible dollars. While this looks better in the short run, should you become disabled, the proceeds from an insurance policy will be taxable income.

Additionally, Social Security disability is not taxable if your provisional income — your modified adjusted gross income plus half of your Social Security benefits — is less than the base amount. Your base amount is:

• $25,000 if you are filing single, head of household, or married filing separately
• $32,000 if you’re married filing jointly
• $0 if you’re married filing separately and lived with your spouse at any point in the year

Talk to a ProVise CFP® professional about disability insurance and protecting your finances

While we wish you good health and that you never have to experience disability, it is good to be prepared. Your disability insurance can supplement your income if you are hurt, and our team can help you build a financial plan around it. 

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about disability insurance and financial planning? Contact ProVise today to schedule a complimentary consultation.