Whether your disability benefits are taxed as income depends a great deal on the type of policy you have and who pays the premiums. Generally, benefits from an employer-provided policy are taxable if your employer pays the premiums, or if you pay them with pre-tax funds. In the case of Social Security benefits, you only report the benefits as income after your total income passes a pre-established threshold.
Disability Through Accident and Health Plans
If you receive disability benefits through an accident or health plan, you must report these benefits as income on your taxes if your boss pays some or all of the premiums. If both you and your employer pay for premiums, you only need to report those benefits tied to your employer's share of payments. On the other hand, if you pay for all the premiums, you don't need to report the benefits as income on your tax return.
Impact of Cafeteria Plan
A cafeteria plan is an employer-sponsored benefit program in which employees select the types of policies they want a la carte, such as life, disability and health insurance. If you pay for your cafeteria plan with pre-tax dollars, the benefits are taxable as income. If you pay with after-tax dollars, the benefits are tax free and not reportable as income. If both you and your employer make premium payments, you report the benefits paid for with your employer's premium payments and with any pre-tax premium payments you made.
Social Security Benefits
If you receive Social Security Disability Income or Supplemental Security Income, you must report the benefits as income if you file as an individual, qualifying widower or head of household on your tax return and your total income is over $25,000. If you file a joint return with your spouse, you must report the benefits if your total combined income is more than $32,000. If you are married, but filed separately from your spouse and did not live together the entire year, you must report your benefits if your income is over $25,000. However, if you file separately from your spouse but still lived together, you must report your benefits if you earned any income.
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State Disability Insurance
If you receive state disability benefits, you may have to report these payments as income depending on who paid for the premiums. If you paid for premiums with after tax dollars, you don't have to report the benefits on your tax return whether you purchased the plan yourself or received it through your employer. If pre-tax dollars were used to pay for premiums, you must report the benefits as income. In some states, SDI benefits are not taxable on state or federal taxes. Check the rules of your state to be certain. For instance, California SDI benefits are not taxable as income at the state or federal level unless they are a substitute for unemployment insurance. In addition, Paid Family Leave, which is part of the state's SDI program, is always taxable on your federal taxes, but not state taxes.
If you receive workers' compensation for an injury or illness sustained on the job, you are not required to report these benefits as income on your taxes so long as the funds are paid pursuant to a workers' compensation act or statute. However, if the benefits are paid from a retirement plan based on your age, prior contributions or length of employment, the benefits are reportable.
VA Disability Benefits
Disability benefits you receive from the U.S. Department of Veterans Affairs are also not reportable as income. These include not just disability benefits, but also pension payments for a disability, dependent-care assistance and grants for wheelchair-accessible homes and vehicles equipped for the blind and for amputees.