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Do I pay taxes on disability benefits?

Osterhout Berger Disability Law > FAQs > Do I pay taxes on disability benefits?

If this is the first year that you’ve been awarded disability benefits through the SSA, know that you sometimes have to pay taxes on the benefits, and you should figure out how much you’re going to owe sooner rather than later. Tax planning earlier in the year can make April a lot less stressful. There are a lot of nuances to understanding how and when you’re taxed on premiums and benefits for private insurance, SSA benefits, individual plans, and group plans. If you have any confusion about your taxes, the benefits that you receive, and the premiums you pay, you can talk to us at Osterhout Berger Disability Law. We’ll answer your questions and find the answers to your specific situation.

Individual LTD Policies

You generally won’t have to pay for the taxes on benefits when you have an individual long-term disability policy through a private insurance company because premiums are paid with after-tax money. While this is generally a relief to people who are receiving their benefits for the first time, you should also know that you’re also not allowed to claim the premiums as medical tax deductions like you would if you were paying for a medical expense like a hospital stay, doctor appointments, and prescriptions.

Group LTD Policies

If you have a group disability policy, such as the kind you might get through your job, the tax liability could fall into one of three categories. You might split the taxes with your employer if you also split the premiums. The second possibility is that your employer pays the premiums. If this is the case, then your benefits are taxable. But if you’re paying the premiums with after-tax income, you don’t have to pay taxes. Basically, if you’ve already paid taxes on a portion, then you don’t have to pay them again, but you do have to pay the taxes if your employer was the one who paid.

You do, however, have to be careful that you know whether you’re paying your premiums with pre-tax or after-tax income. If you’re paying for the premiums with pre-tax money, you have to pay taxes on the benefits. For instance, if you’ve elected to have your employer take out pre-tax money from your paycheck to pay your portion of the premiums, you would still need to pay the taxes on the benefits. You might also be using pre-tax money to pay premiums if you have a cafeteria plan that funds the premium.

LTD Settlements

There are times when you might receive a lump-sum payment because the insurance company settled with you for a specific amount that they pay out in one large payment instead of paying a monthly amount every day until you retire. Insurance companies will sometimes offer these types of settlements if your condition is not likely to improve because they would rather pay a smaller amount upfront rather than pay every month until you reach retirement age.

If you’re offered a settlement, you should be aware that there are several ways that your settlement could affect your taxes, depending on the type of plan that you have and whether you pay premiums with pre-tax or post-tax money. The taxes that you pay can greatly affect whether it’s in your best interest to continue to take monthly payments or take the lump sum cashout you’re offered. It’s always best to consult with us at Osterhout Berger Disability Law before you accept a lump sum payment because you can’t switch back to the monthly disbursements after you agree to the settlement if you later change your mind.

Deducting LTD Premiums

It’s reasonable to wonder if your long-term or short-term disability premiums are tax-deductible. Unfortunately, though, they’re not because they’re not considered by the IRS to be a qualified medical expense, which would include things like dentist, doctor, and psychiatric appointments, prescriptions, hospital care, eye care, and several other types of medically necessary care. You should, however, continue to keep up with your premiums even though you won’t get a deduction for the payments.

SSD Benefits and Taxes

Some people only receive disability benefits through a private insurer, but some people receive their benefits through the Social Security Administration or a combination of the SSA and a private insurer. It’s very reasonable to wonder if the benefits that you receive through the SSA are taxable.

Social Security benefits were set up as a safety net for people over a certain age and those with disabilities during the Great Depression. So people falling under a certain income level won’t be taxed on benefits that are intended to help them.

In general, whether or not you’re taxed and to what extent you are can depend on whether or not your total income is over a particular threshold. Most people who are receiving SSA disability benefits don’t cross over that IRS threshold, so there’s no reason that they would need to pay taxes on that disability income.

The threshold where people have to start paying taxes on their disability benefits will depend on whether they’re single or married people. Calculate your total income by adding one-half of your disability benefits to all other sources of income. This number will include tax-exempt interest. If you’re married and filing jointly, you should add in your spouse’s income.

Additionally, the amount that you pay will depend on the exact income bracket that you fall in. For instance, during the 2021 year, for a person filing as single, they’ll pay 50% on benefits if their income is between $25,000 and $34,000. But they’ll pay up to 85% if their income is more than $84,000. A couple filing jointly will end up paying up to 50% if their income is between $34,000 and $44,000, but they’ll pay up to 85% if their income is more than $44,000.

State Taxes On SSD Payments

Additionally, whether your state taxes you for these benefits will depend on the state that you live in. Thirteen states impose taxes on disability benefits from the SSA, so you should take the time to better understand your state’s laws. The amount to which you’re taxed can vary according to your state and how much you make. The states that tax on benefits include Connecticut, Colorado, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Montana, North Dakota, Rhode Island, West Virginia, Vermont, and Utah. The income criteria that most of these states set are very similar to the criteria that the IRS sets.

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