How Short Term Disability Could Impact Your Taxes
Northwestern Mutual: Many people don't realize what tax implications can come from going on short term disability. Are insurance premiums tax-deductible? Is short term disability taxable? There are many questions surrounding the issue, and the only answer to all of them is it depends on what kind of coverage you have.
It's common to have a mix of pre- and post-tax disability coverage, and each policy comes with different tax impacts. This guide will help simplify some of the major concepts so that you can make informed decisions when choosing your coverage.
Pre-tax disability coverage
Pre-tax disability means the disability benefits paid to you are subject to federal income tax. Pre-tax disability is often offered by your employer as part of a group plan.
Any taxable portion of your disability benefit is taxed as income.
Post-tax disability coverage
Post-tax disability benefits are not subject to federal income tax.
Post-tax policies are usually purchased by individuals on their own, often because they don't have a short term disability policy through their employer or they want to purchase additional coverage. Premiums tend to be more expensive with these plans, but benefits can also be higher.
How to report taxes on short term disability benefits
According to the IRS1, "If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay to the insurance company or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals."
If you decide to file a Form W-4S, that means you are electing to have taxes taken out of the benefit payments automatically. If you decide not to have taxes automatically taken out, you may face a larger tax bill at the end of the year and/or you may need to make estimated tax payments.
The amount of taxes you could owe on the earnings will vary from person to person depending on a myriad of factors, including your adjusted gross income, how much you've already paid in taxes (or had withheld from regular paychecks) throughout the year, and other factors. It's best to consult a professional tax advisor or contact the IRS directly to fully understand your specific tax obligation.
The bottom line
If you become unable to work due to illness, injury or childbirth, and you are covered by a short term disability policy, you may receive benefits that replace a percentage of your income.
Those benefits may be taxable depending on factors including who pays the premium and what area you live in. While the decisions are ultimately up to you, speaking with a financial advisor is a great way to find out how disability income insurance can fit your financial plan, and a local expert will be able to help you forecast the tax impact on various parts of your plan specific to your area.
To be used with form MN 992-STD, MN 992-LTD, MN 1096 SGSTD, MN 1096 SGLTD, ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.DI.CAT.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative. Product availability is subject to state approval. Disability insurance policies contain exclusions and limitations that could affect individual coverage. For costs and more complete details, consult a Northwestern Mutual financial representative.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits).
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