Hey Dave,
Are disability payments taxable?
Anne
Anne,
This is a good question, but there is no correct general "yes" or "no" answer. The taxability of disability payments depends on what type of disability benefits you receive, whether the premiums were paid with pre-tax or after-tax dollars, and who paid the premiums.
Usually, when the disability insurance is considered to have been paid for by the employee with after-tax dollars, any benefits are non-taxable; this is sometimes referred to as the “Bosworth Rule” after the Seattle Seahawk football player. On the other hand, when the disability insurance is considered to have been paid for by the employer, the benefits are taxable.
If you are receiving Social Security Disability benefits through the Social Security Disability program, whether those benefits would be taxable (up to 85% subject to income taxes) will depend on your other income. At a low income, it may be that Social Security Disability benefits are not taxable. If you are receiving your disability payments through the Supplemental Security Income program (a separate program from Social Security Disability), it would be unusual for any of the benefits to be taxable because generally the other income is too low to make them subject to taxation.
Veteran's Administration (VA) disability benefits are generally tax free. VA benefits and military pensions are taxable if the disability pension is based on years of service or the disability benefits are in excess of the VA benefits the taxpayer would have otherwise received. Workers’ compensation that is paid to a worker (or survivor[s]) is not taxable.
The issuer of the benefits should be able to tell you whether or not the specific benefits you are receiving are taxable or provide you with the information you need to make the correct determination.
- Dave