Are Disability Insurance Proceeds Taxable?

In a July 2013 article, the Council for Disability Awareness published a statistic stating that over 1 in 4 people currently in their 20s will become disabled before they retire, and that 6% of working-age Americans are currently disabled.

According to the Insurance Journal's June 2011 article, only 49% of US workers have short-term disability insurance and only 44% have long-term disability insurance.

What are the tax consequences if you become disabled and receive disability insurance proceeds?

It all depends on who paid for the disability insurance policy.

The proceeds from a disability insurance plan will not be taxable if:

1. You pay all the premiums for the policy;
2. The disability insurance is provided through your employer, but the premiums are paid with after-tax dollars (effectively, you pay the premiums through your paycheck);
3. The disability insurance is provided through your employer's cafeteria plan; or
4. The proceeds are a reimbursement for actual medical expenses, permanent loss or loss of use of part of the body, or permanent disfigurement.

The proceeds from a disability insurance plan are taxable if your employer paid the premiums and the premiums were not taxable to you.

If you have any questions about this, please feel free to send me an e-mail.