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December 14, 2009
How Short Term Disability Benefits Are Taxed
If you have injured yourself (on or off the job) and have been rendered temporarily disabled, you may be collecting short term disability benefits. The benefits may be paid out by the social security administration or from disability insurance provided by your employer.
How short-term disability benefits are taxed varies depending on whether they are public benefits (such as social security) or private benefits, such as those provided by your employer. Taxation of these types of benefits also varies greatly from state to state and program to program. It is beneficial to speak with a qualified tax advisor in your area early in your short term disability period to know exactly what to expect. Below are some guidelines to get you started.
Public Short Term Disability Benefits
Generally speaking, if Social Security Disability (SSD) is the only income you are receiving, you can expect to pay little to no tax on that income. The reasoning is that the public disability benefit is considered to be limited income. In this case, the IRS gives you a break by taxing only a portion of the benefits based on what other income you may be receiving. If you are receiving other income, such as worker’s compensation benefits, investment income or other income, you must take a look at the IRS’s guidelines more closely. Even if you receive no other income during your disability period, but did receive income from your employment during a portion of the year, you will have to pay taxes on a portion of the income. Generally, the federal guidelines are as follows:
• If you file a federal tax return as an "individual" and your combined income is at least $25,000 but not greater than $34,000, you may have to pay income tax
on up to 50 percent of your temporary Social Security Disability benefits.
• If your combined income is above $34,000, you will have to pay taxes on up to 85% of your SSD benefits
If you file a joint return:
• You could be taxed on up to 50 percent of your SSD benefits if your household’s combined income is between $32,000 and $44,000.
• If your combined income is greater than $44,000, up to 85 percent of your Social Security benefits are subject to income tax.
• If you are married and file a separate tax return, you are likely to pay taxes on your benefits.
Again, the rules will vary from state to state, and you should discuss your personal situation with a qualified tax professional.
Private Short Term Disability Benefits
For short term disability benefits paid by private insurance plans, the rules are different. The IRS will tax either the premiums that were paid for the disability insurance policy or the actual benefits paid to the claimant. If the premiums deducted from an employee’s paycheck are paid with after-tax dollars, they were included in taxable income, thus the benefits received from the policy are not taxable income. If, on the other hand, the employer offers the short term disability insurance as an employee benefit and deducts the premiums as a business expense, then the IRS taxes the benefit payments made to the claimant. If you have started or will soon start receiving short term disability benefits from an insurance plan, make sure you understand how the plan is taxed by the IRS.
Now that you understand the basics of how the IRS taxes short term disability benefits, make sure you speak with a qualified tax professional to get specific information that is pertinent to your own personal circumstances.