Is Disability Income Taxable?

Depending on the type of disability income you receive, it could be fully taxable, partially taxable, or nontaxable. Disability income could be from Social Security benefits or from disability insurance plans. Let’s take a look at both scenarios.

Social security disability benefits are treated in the same manner as other social security benefits. To determine whether Social Security Disability is taxable, you need to look at your other income in addition to these benefits. The IRS provides a break by taxing only a portion of the Social Security benefits depending on the amount of other income. For individuals with total income between $25,000 and $34,000, 50 percent of your Social Security Disability is subject to income tax. If you are married and file a joint return, you may have to pay taxes on 50 percent of your benefits if your total income is between $32,000 and $44,000. However, if total income is above those $34,000 and $44,000 thresholds, 85 percent of your Social Security Disability is subject to income tax. No one ever pays income taxes on more than 85 percent of his or her Social Security benefits.

Disability insurance payments may or may not be taxable, depending on who pays the premiums. If an employer provides short term and/or long term disability at no cost to its employees, disability benefits received by the employee are fully taxable. However, premiums could be partially paid for by the employer and employee. The disability benefits are taxable in proportion to how the premiums were paid. Alternatively, if an individual purchases disability insurance and pays all the premiums, any disability benefits received are not taxable.

If you have any questions related to disability income, feel free to contact Anders and we will be able to assist you.