Question

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

Answer

Regarding your questions: Is disability insurance taxable — Is short term disability taxable, it depends on the source of the disability income:

  • Income from a workers’ compensation fund isn’t taxable if it’s compensation for an on-the-job injury or sickness.
  • Disability income from a disability-insurance policy is taxable depending on how the premiums were paid:
    • You can exclude income from long-term or short-term disability benefits from a disability policy:
      • You bought yourself with after-tax dollars
      • You received from an employer plan paid with after-tax dollars. You must have chosen to have the coverage paid by your employer with after-tax dollars before the beginning of the plan year.
    • You must include income from long-term or short-term disability benefits whose coverage your employer paid using pre-tax dollars for the plan year when you became disabled.
  • 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
    • $ 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 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
  • $44,000 if married filing jointly
  • $0 if you’re married filing separately and lived with your spouse at any time in the year

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