Tax Planning Tips: Disability Insurance
The income you receive from disability income insurance may or may not be taxable. The taxability of disability income insurance benefits depends on what type of benefits you receive, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums (you or your employer).
Individual disability income insurance
The rules surrounding taxation of individual disability income insurance benefits are generally simple. Because you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, unlike health insurance premiums, you can't deduct premiums paid for individual disability income insurance as a medical expense.
Sometimes, your employer pays for an individual disability insurance policy on you. This may be the case if you are considered to be a key employee of the business. If so, different rules may apply. If the employer gets the benefit, then the premium is not deductible to the company, and the benefit is not taxable when received by the company.