Yes, long–term disability benefits can be taxable, depending on how the insurance premiums were paid. If you paid the premiums with after-tax dollars, your benefits are generally not taxable. But if your employer paid the premiums, or you used pre-tax dollars, you’ll likely owe taxes on the benefits you receive.
Understanding how your disability benefits are taxed is essential, especially if you’re relying on that income while you can’t work. The last thing you want is an unexpected tax bill during an already stressful time.
Are you wondering, “Is long-term disability taxable?” If so, you should partner with an experienced long-term disability lawyer in Virginia who can help you understand your benefits and options.
(We are not tax attorneys or financial consultants. This is general information only. You should get with human resources if you have questions about how your premiums are paid, and always check with your own tax advisor for specific tax or financial planning advice.)
What is Long-Term Disability Insurance?
Long-term disability (LTD) insurance provides income replacement when you’re unable to work due to an illness or injury. These policies typically replace 50% to 70% of your income, helping you stay financially afloat while you recover.
You may have LTD coverage through your employer or purchase an individual policy on your own. While the policies might seem similar, how the premiums are paid plays a major role in determining whether the benefits are considered taxable income.
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When are LTD Benefits Taxable?
If your employer pays the full cost of your long-term disability policy, then the monthly benefits you receive are considered taxable. The IRS views this as income because you didn’t pay for the coverage yourself.
The same applies if you paid the premiums using pre-tax payroll deductions. Since you received a tax break when you paid into the plan, you’ll owe taxes when the benefits come in.
Here’s a typical example: Your employer provides a group long-term disability policy and pays the full premium. You later become disabled and start receiving $3,000 per month. That full $3,000 would be considered taxable income.
When are LTD Benefits Not Taxable?
On the other hand, if you paid your long-term disability premiums using after-tax dollars, your benefits are generally tax-free. Since you already paid taxes on the money used to purchase the policy, the IRS doesn’t tax the benefits you receive.
This is common with private, individually purchased LTD policies. If you bought a policy on your own and paid out of pocket, you can typically expect the monthly benefits to be tax-free.
For example, if you’ve been paying $100 per month for an LTD policy using your take-home pay, and you later qualify for $3,000 in monthly benefits, that full amount is usually tax-free.
Mixed Contributions: What Happens?
Some policies are paid with a combination of employer and employee contributions. In that case, the portion of the benefits tied to the employer-paid premiums will be taxed, while the portion you paid with after-tax dollars will not be.
It can get complicated quickly, especially if you’re not sure how your policy was funded. That’s why it’s important to talk to your HR department, the insurer, or a long-term disability lawyer to get clarity on your specific situation.
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Tax Reporting and Forms
If your long-term disability benefits are taxable, you’ll likely receive a W-2 or 1099 form to report the income on your tax return. Be sure to check these documents carefully. Sometimes insurance companies make errors in how benefits are reported.
Keeping good records and understanding how the IRS views your benefits will make tax season far less stressful. If you’re unsure, consult a tax professional or an attorney who works with long-term disability claims regularly.
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Can You Deduct LTD Premiums?
Generally, you cannot deduct long-term disability insurance premiums on your federal tax return if you paid for the coverage with after-tax dollars. While some medical-related expenses can be deducted, disability premiums usually don’t qualify—unless you’re self-employed and paying for the coverage as part of a business expense.
What if You Have More Than One Policy?
If you have multiple disability policies, such as a group plan through your job and an individual plan you bought on your own, your tax liability may vary. One set of benefits might be taxable, while another is not.
For example, benefits from the employer-paid portion of your group plan would likely be taxable, but benefits from the private policy you paid for yourself may be tax-free. In these cases, it’s a good idea to review your documentation and get guidance from a legal or financial professional.
What if You’re Facing a Denial or Delay?
Even after understanding how your LTD benefits are taxed, you might run into another roadblock: getting the insurance company to actually pay your claim. Unfortunately, long-term disability denials are common, especially with large insurers who may delay or reject claims to protect their profits.
Talk to a Dedicated Long-Term Disability Lawyer at BenGlassLaw
If your claim has been denied or delayed, or you’re being pressured into a settlement that doesn’t reflect your situation, it’s time to talk to an experienced attorney.
A long-term disability lawyer can help you understand your policy, challenge an unfair denial, and ensure you receive the benefits you’ve earned.
To learn more about your rights and options, contact the long-term disability lawyers at BenGlassLaw and get your free consultation today.
BenGlassLaw Can Help You Understand Your Long-Term Disability Benefits
So, is long-term disability taxable? The answer is yes, your benefits are generally taxable. If you’re facing challenges with your insurance company or just want help making sure your rights are protected, don’t hesitate to reach out.
To learn more about long-term disability claims, appeals, and how your benefits may be taxed, speak with the experienced attorneys at BenGlassLaw.
Get your free consultation today and take the first step toward clarity and confidence, then visit our FAQ page to learn more.
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