Should my long term disability insurance be taxable?

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PostPosted: Tue Jan 14, 2014 1:07 pm   Post subject: Should my long term disability insurance be taxable?  

My employer offer long term disability insurance as a standard benefit and I’m the sole one to determine whether or not to make it taxable. So here I was having some questions:



1) Would the premiums be added to my taxable income?

2) Would I still be required to pay taxes on the benefits if I’m actually disabled?



Since the premiums aren’t very high and the benefits are capable enough to replace my current income, it seems to me that taxing it now is a good idea.



Could anybody say what would be the pros and cons of such an arrangement?


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MeccaB
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PostPosted: Wed Jan 15, 2014 6:25 am   Post subject:   

Play with some figures first. Find out the net (after paying for taxes) money you’d have if you opt it as taxable. Then look at the difference by subtracting the after tax benefit amount from the tax free one.


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Rosenthalfiles
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PostPosted: Wed Jan 15, 2014 7:15 am   Post subject:   

Disability insurance never replaces your current income entirely. Payments are usually 60% to 65% of your salary.



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PostPosted: Sun Jan 19, 2014 3:42 am   Post subject:   

Neither of the posts above have answered your questions.



Your disability income payments would be tax-free if you pay the premiums or you have the premiums "imputed' to you as income (which means you pay tax on the value of the premiums).



If you do not pay the tax on the premiums, then your benefits will be treated as income and taxed according to your gross income at the end of the year. Some insurance companies will withhold federal income tax from your payments, but most will not. The "con" in this is that your failure to set aside some of the disability payment each month to cover the income tax liability could end up causing you to pay penalties and interest for being "underwithheld" for the year.



The "pro" in this is that for most people, having a tax-free benefit is better. If the total premiums (yours + employer's) are relatively low, your tax on the imputed income will never be as great as the tax on your benefits. Obviously, if you are never disabled, then you are paying tax on money you never received, which is a "con". But, for what it's worth, I believe that's a very small price to pay, knowing that if something happens, you will be rewarded many times over in return.



If your disability insurance is true group insurance, depending on the industrial classification of the group, you are probably looking at less than $2.00 per $1,000 of monthly benefit per month in premiums. If your monthly income is $5,000 and your disability benefit is 60% of that ($3,000), your premium will be $6 per month, or $72 per year. At a 30% tax rate, however, you would pay only $21.60 in extra income tax, but if you were disabled for one year, you would pay $10,800 in income tax on $36,000 of benefits. $22 or $10,800? I think the answer is obvious.



Having more money in your pocket when disabled is preferable in most cases.



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PostPosted: Mon Feb 24, 2014 2:10 pm   Post subject:   

I get a small disability benefit from my employer and it is taxable, I have it taken out monthly. Right now it is temporary but at some point should become permanent since I have also been recieving social security.

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PostPosted: Mon Mar 03, 2014 7:20 am   Post subject:   

Taxability of DI benefits is dependent on who pays the premiums and/or who pays the tax on the value of the premiums. If the employee does not pay the premiums, and the value of the premiums is not imputed to the employee as income, then the benefit is taxable as income. Most employers do impute the premiums to the employees so their benefit is received tax-free.



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