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Is Disability Income Taxable?

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Most people think that they will never become disabled. However, statistics show that one out of every four twenty year olds will become disabled before they retire. That means 25% of people will have a sickness or injury that is so severe that they won’t be able to work. Social Security may provide some disability benefits, but most people will have to rely on a personal or work provided disability policy in order to make ends meet. Your accountant in Billings, Montana can help you determine if those benefits are taxable.

 

 

 

What Type of Disability Insurance do You Have?

Not all disability insurance policies are created equal. Therefore, they are not all taxed the same either. There are three basic types of disability policies out there.

Social Security – The same program that will (hopefully) help provide retirement benefits also provides benefits to those who become disabled before they retire. The application process is cumbersome, and proving disability can be a chore.

Employer Benefit – Many jobs have disability insurance as an employer benefit. Part of your paycheck is the fact that if you are disabled, then you can file a disability claim through whomever the employer has purchased their group plan. These policies generally only cover about 60% of wages.

Personal Benefit – A personal disability insurance policy can be added to the employer policy to bring a person up to nearly 100% of pre-disability wages. For example, a person makes $1,000 per month. The employer plan covers $600 of that wage. The individual can buy an additional policy to cover the other $400 (or more than likely it would be about $350 in benefit).

How are Disability Benefits Taxed?

The different disability policies will be taxed differently. It all depends on how the policy is provided.

Social Security benefits may be taxed depending on what your income is. If you are married and filing jointly, your benefits and your spouse’s income can total no more than $32,000 per year. If it goes over that amount, then your benefits, or some of your benefits, are subject to tax.

Employer sponsored benefits are almost always taxed. So if you have a group disability plan, you likely only have 60% of your wages covered. Take away another 20% in taxes, and you are left with less than half of what you were making before disability.

Individual disability benefits are almost never taxed. This is why it is important to bulk up your coverage instead of just relying on employer sponsored benefits. Think of it this way: you paid for your individual policy with money that you already paid tax on. The benefit is therefore not taxed. You received the group policy and did not pay tax on the money used to buy that policy. The benefit is therefore taxed.

Speak with Your Accountant in Billings, Montana

If you are collecting disability benefits, whether from Social Security, a group policy, an individual policy, or a combination of any of those, you should have an accountant in Billings, Montana do your taxes. Disability benefits can become tricky and confusing. Instead of trying to navigate them yourself, leave it up to the professionals.

Here at Practical Taxes we know and understand taxes. We also do everything else that a full service accounting firm does from online payroll services to business consultation to everything in between. Call 406-894-2050 to set up your appointment today!

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