Question

Is disability insurance taxable — Is short term disability taxable income?

Answer

The answer to the question “are disability payments taxable?” is this… How disability payments are taxed depends on the source of the disability income. The answer will change depending on whether the payments are from a disability insurance policy, employer-sponsored disability insurance policy, a worker’s compensation plan, or Social Security disability.

What is Disability Insurance?

Disability insurance is a type of insurance that provides income in the event that an employee is unable to perform tasks at work due to an injury or disability.

disability insurance

Disability insurance falls in two categories:

Short-term disability: This type of insurance pays out a portion of your income for a short period of time – and can last from a few months to up to two years.

Long-term disability: This type of insurance begins after a waiting period of several weeks or months – and can last from a few years to up to retirement age.

Disability insurance can come from different sources. Disability insurance can be provided by your employer or something you buy yourself from an insurance company.

Is Disability Insurance Taxable?

Disability benefits may or may not be taxable. You will not pay income tax on benefits from a disability policy where you paid the premiums with after tax dollars. This includes:

  • A policy you bought yourself with after-tax dollars
  • A employer sponsored policy you contributed to with after-tax dollars. These rules apply to both short-term and long-term disability policies. Income from social security disability isn’t taxable if your provisional income isn’t more than the base amount. Provisional income is your modified adjusted gross income (AGI) plus half of the social security benefits you received. The base amount is:
    • $25,000 if you’re filing single, head of household, or married filing separately (living apart all year)
    • $32,000 if you’re married filing jointly
    • $0 if you’re married filing separately and lived together with your spouse at any point in the year
    • Your modified AGI includes all other income without subtracting exclusions for:

Is Social Security Disability Taxable?

Income from social security disability isn’t taxable if your provisional income isn’t more than the base amount. Provisional income is your modified adjusted gross income (AGI) plus half of the social security benefits you received. The base amount is:

    • $25,000 if you’re filing single, head of household, or married filing separately (living apart all year)
    • $32,000 if you’re married filing jointly
    • $0 if you’re married filing separately and lived together with your spouse at any point in the year
    • Your modified AGI includes all other income without subtracting exclusions for:
  • Interest from qualified U.S. Savings Bonds
  • Employer-provided adoption benefits
  • Foreign earned income or foreign housing
  • Income earned by a bona fide resident of American Samoa or Puerto Rico

To figure your provisional income, use Publication 915, Worksheet A.

If your provisional income is more than the base amount, up to 50% of your social security disability benefits will usually be taxable. However up to 85% of benefits will be taxable if your provisional income is more than the adjusted base amount. The adjusted base amount is one of these:

  • $34,000 if you’re filing single, head of household, or married filing separately (living apart all year)
  • $44,000 if married filing jointly
  • $0 if you’re married filing separately and lived with your spouse at any time in the year

Is Workers’ Compensation Taxable?

Income from a workers’ compensation fund isn’t taxable if it’s compensation for an on-the-job injury or sickness.

Get Help

Navigating the tax treatment around disability payments can be tricky, which is why we’re here to help. For more help on determining if you need to pay tax on disability insurance, get help from a tax pro at H&R Block. Find a tax office near you.

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