Disability insurance provides a supplementary income if you become sick or experience injuries from an accident that prevents you from maintaining your regular employment. Disability benefits are usually paid monthly, and the goal is to help you maintain a standard of living comparable to what you had when working.
It can be a bit confusing when talking about disability benefits because there are two main categories.
There are Social Security disability insurance benefits (SSDI). Then, there are individual disability insurance policies.
We’ll delve into both and then answer whether or not they’re taxable.
Private Insurance vs. SSDI
When you’re disabled because of an injury or illness, it puts you at risk of losing income.
The general commonality between private insurance and SSDI, which are two forms of protection if you find yourself in this situation, is that they can reduce the economic hardship you face when you can’t work because of a disability.
SSDI is for workers who have contributed to the Social Security system for a long enough period, and it requires that you meet stringent standards as far as what total disability is.
Private insurance tends to have more benefits and fewer requirements to qualify.
Social security disability insurance covers 150 million people in the U.S. If you’ve worked for long enough and during that time you’ve contributed to social security, you are covered by SSDI.
The benefits under this program are paid monthly, and the average worker will receive around $1,200 a month.
There are some core things you have to show to be eligible.
You have to show that you can’t work in your previous job, you can’t adjust to new work, and your disability will prevent you from returning to work for a minimum of a year.
If you’re temporarily or only partially disabled, you aren’t eligible for SSDI benefits.
You must have been disabled for at least five months for SSDI benefits to be paid out, but some conditions are considered severe enough under this system that you wouldn’t have to show you were unable to work to be eligible to receive benefits.
Around 30% of workers have disability insurance through their work, or you can decide to purchase it individually to protect yourself if anything happens to you.
The most significant benefit of a private disability plan is that they have a much broader and more inclusive definition of a disability.
Private disability insurance may also replace more of your lost income than would be covered by SSDI. SSDI benefits can’t exceed a certain amount each month, based on your average lifetime earnings.
If you have private insurance, you may find that it covers around 70% of the salary you were receiving when your disability started.
There’s also something called Supplemental Security Income to be aware of. SSI is for adults and children who are disabled and have limited resources and income. The benefits are based on a federal benefit rate. They might be reduced by other types of income you receive.
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Is Disability Income Taxable?
So now back to the original question—is disability income taxable?
There are different rules depending on the specific type of income.
SSI payments are not taxable.
SSDI benefits are similar to other types of Social Security income in that you have to report them on your tax return. Whether or not you have to pay tax on them depends on your total income and benefits for that year.
It is possible that you would have to pay tax on SSDI benefits.
For private disability insurance payments, federal tax rules are based on who paid the premiums and how they did so.
If your employer paid your premiums, typically, the income you get from a private disability is taxable to you. If you paid the premiums, whether or not it’s taxable is based on if you paid with pre-or post-tax money.
A pretax deduction is taken from your pay before any tax withholding, reducing your taxable income. Post-tax deductions are taken after the withholding of your income and payroll taxes.
If your premiums were paid with pre-tax money, then you would get the tax advantage currently. If in the future you were to then receive disability payments, they would be taxable income.
The big takeaway is that in some cases, disability payments are taxable. Talk to a financial professional if you’re unsure to avoid running into trouble about it later.
