How are disability benefits taxed?


Disability benefits received from a long term disability insurance policy can be either tax free or taxable as regular income. The important determining factor is how the disability premiums were paid prior to the disability claim.

If an individual person paid for the premiums for their disability insurance policy out-of-pocket with their own after-tax dollars, then disability income benefits are not considered taxable income.

Conversely, if a person’s long term disability policy was provided as an employee benefit  and paid for by an employer, then any disability income benefits are considered insured taxable income. There are scenarios when an employer can provide long term disability coverage and include the disability premiums as part of the employee’s compensation plan in order to ensure future disability benefits are not treated as taxable income.

It is important to consider the tax treatment on potential future disability benefits when determining the correct amount of coverage to apply for.

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