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If you’re injured, sick, or can’t work for some other health reason and receive a payment for your disability, is it taxable?
Seems like a simple question, but the answer is not.
It depends on where the income comes from and who pays for the coverage. Some people have disability insurance they buy on their own, others have it as an employee benefit, and others receive it as part of a government program.
One general type of disability income comes from the Social Security Administration.
First, some basic information about Social Security:
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Social Security retirement benefits are monthly payments based on your lifetime earnings. In order to collect, you must be age 62 or older and have worked and paid Social Security taxes.
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Social Security Disability Insurance (SSDI) payments are made monthly for people who are blind or have a disability that stops or limits their ability to work, and they have enough work history to qualify. Some people just call this “disability.”
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Supplemental Security Income (SSI) provides monthly payments to people with disabilities and people aged 65 or older who have few resources or little or no income. The monthly payment depends on income, living situation, what you own, and more.
The main differences between SSI and SSDI involve your work history. SSDI is tied to your work history, while SSI does not require a work history and provides money to cover basic living expenses.
In general, retirement and disability benefits can be taxable. Supplemental Security Income is not taxable.
The answer is maybe. The amount of SSDI benefits that may be taxable depends on your total income and benefits for the tax year.
You first need to determine your “provisional income,” which most tax software can calculate. You can also figure it out yourself by adding up your gross income, any tax-free interest earnings, and 50% of your Social Security benefits.
According to the Internal Revenue Service, your SSDI benefits may become taxable if your provisional income exceeds these thresholds for your filing status:
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$25,000 if you’re single, head of household, or qualifying surviving spouse
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$25,000 if you’re married filing separately and lived apart from your spouse for the entire year
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$32,000 if you’re married filing jointly
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$0 if you’re married filing separately and lived with your spouse at any time during the tax year
Married people filing a joint return must count their combined income and Social Security benefits when figuring the taxable portion. Even if one spouse does not receive benefits, both incomes must be included.
Income from SSDI isn’t taxable if the base amount is higher than your provisional income.
There’s more. You also need to determine how much of your benefits are taxable.
Single taxpayers with provisional income between $25,000 and $34,000, and those filing jointly with provisional income between $32,000 and $44,000, will owe federal income tax on up to 50% of their Social Security disability benefits.
Taxpayers above those thresholds will owe federal income tax on up to 85% of their SSDI benefits.
Based on these formulas and thresholds, only about half of people who receive Social Security benefits pay federal taxes on those benefits.
At the beginning of each year, the Social Security Administration will send a Social Security Benefit Statement (Form SSA-1099 or SSA-1042S) showing how much you received in benefits the previous year.
These calculations and thresholds can always change if Congress passes bills to change the taxation rules and amends the Internal Revenue Code.
Again, the answer about whether income from disability insurance is taxable is it depends.
The biggest determiner is who paid for the disability, accident, or health insurance plan.
Many people buy short-term or long-term disability policies either on their own or through a payroll deduction. How the policy is paid for and the type of policy makes a difference in whether it is taxable or not.
According to the IRS:
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If your employer pays for the plan, the disability payments are taxable.
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If you pay the premiums with after-tax dollars, the disability benefits are not taxable.
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If you and your employer both pay the premiums for the plan, only the amount you receive for your disability that’s from employer’s payments is reported as income.
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If you pay the premiums with a salary reduction (pretax) through a cafeteria plan and you don’t include the amount of the premium as taxable income, disability benefits paid out are fully taxable because the premiums are considered paid by the employer.
On a related note, any sick pay you receive from things like a state sickness or disability fund, welfare fund, or an employee association is taxable income.
Remember, we’re talking about federal taxes here. Some states levy taxes on their residents for disability payments.
Since this can be confusing, it’s important to consult an accountant or tax professional if you have questions about your personal tax situation.
We’re talking about policies like the one with the quacking duck here.
Fixed-indemnity insurance policies pay a set amount of money based on a certain event, like a medical diagnosis.
If you pay the premiums with after-tax money, the benefits are not taxable. If an employer contribution pays for an employee’s plan or the employee pays the premium through a salary reduction via a cafeteria plan, the benefits might be taxable.
Whether you have to report disability income on your federal tax return depends on the type and source of income. If the payments come from Social Security, Social Security Disability Insurance payments may be taxable if you reach a certain income threshold.
Supplemental Security Income is not taxable.
If the money comes from a long-term or short-term disability policy, it depends who paid the premiums.
If you don’t meet the threshold for income, you might not have to file a tax return or pay taxes. If you do not file, you cannot get a refund.