subject: Long Term Disability Income And Taxes [print this page] There is a way to get disability benefits without being forced to pay taxes on the money. It is important to note that you cannot wait until you are receiving benefits. You must pay for your insurance policy with money that has already been taxed. If you pay for your disability protection contract with monies that escape taxation, you will not escape taxation when you get benefits.
Insurance benefits are usually not taxable. If you have an accident and file a claim you are not likely to have to pay taxes on any of the money you receive in benefits. This is also true when you file a claim on your house insurance.
Why are insurance benefits usually not taxable? There is no profit involved. When you get money from an insurer to fix your vehicle after an accident, you are just being made whole.
Disability insurance isn't different because it involves income. It isn't treated differently because it involves physical disabilities. It is different because sometimes individuals pay for policies with pre-tax dollars.
If you paid for your policy with pre-tax dollars, then any benefits you receive will be subject to taxation. This is because you got a tax break when you were paying the premiums.
On the other hand, if you paid with post-tax dollars you can expect that in most cases your benefits will be tax free.
(Medical insurance pays benefits that are not subject to taxation. You can expect to receive benefits on a tax free basis whether post-tax of pre-tax monies are used to pay for your premiums.)
Paying with pre-tax dollars means that the money used to pay for your insurance was not used to calculate what you owe in taxes. In another words, if your taxable gross pay was reduced by the amount of the premiums, you paid with pre-tax dollars
If your employer pays for your disability insurance without a payroll deduction then your premiums are being paid with pre-tax dollars. Your employer is writing off the cost of your premiums. This means that any money you receive will be subject to taxation.
If your premiums are being paid through an automatic deduction from your paycheck, your benefits may or may not be taxable. This is because money deducted from your paycheck can be done on either a pre-tax or post-tax basis. You will need to ask your personnel department if you do not know which method is being used.
Income replacement insurance companies will generally allow you to insure no more than seventy percent of your gross income. The insurers want to make sure that you have an incentive to go back to work. Paying too much can cause a claimant to malinger. This raises the insurer's costs and also raises the premiums for their insurance policy.
Receiving seventy percent of your former income is probably enough to allow you to maintain your lifestyle if you receive your benefits on a tax free basis. However if you have to pay taxes on the insurance proceeds, you may have to make some serious adjustments.
The trade-off regarding this issue is that you will effectively pay more in premiums if you want your disability insurance proceeds to be tax free. Although the amount of your premiums will be the same either way, you will pay more in taxes during the period of time that you pay premiums if you want your benefit to be received without taxes taken out when you do have a claim.
Income replacement insurance is provides critical benefits. If you can't maintain your lifestyle without job based income, you will benefit from getting disability insurance quotes. This coverage may surprise you with its price. It is probably less expensive you may think.
