Is Long Term Disability Taxable?

Is Long Term Disability Taxable – Overview

The navigation of long term disability insurance can be really confusing sometimes. Long-term disability insurance generally offers financial benefits if you are unable to work due to an injury or chronic illness for a longer period. Long-term benefits can be both tax-free and taxable.

You can always seek guidance from a tax professional or an accountant to determine whether your policy has any tax benefits.

Multiple factors can affect the taxability of your long term disability insurance. The taxability of your plan depends on which type of policy you choose, whether it is a private policy or a group policy, and the percentage of your premium.

Is Long Term Disability Insurance Taxable?

This question has a complex answer. Although long term disability insurance can be taxable and non-taxable, it entirely depends on different factors.

  • If you are covered by a private policy or a group policy through your employer
  • If you pay pre or post-tax dollars or premiums
  • The percentage of the premium that you need to pay within the policy

Private Long Term Disability Insurance Policy

Private long-term disability insurance is purchased individually outside of employer-based plans. You pay the entire premium yourself. The taxability of your policy depends on whether you pay your premiums with post-tax or pre-tax funds.

  • When you make a payment that has not been taxed yet, it is called the Before tax or pre-tax dollars.
  • When you make a payment that has withheld tax dollars, it is called after-tax dollars or post-tax dollars. There is no need to pay for this later.

If you pay your premiums with pre-tax dollars, your disability benefits are typically taxable. If you pay your premiums with after-tax dollars, your disability benefits are generally not taxable. Most private insurance policy premiums have the payment option with post tax dollars.

However, ultimately, it is all about the claimant’s choice. People often choose a post-tax option to avoid any additional payment later. With this option, the taxes will already have been paid.

Is Long Term Disability Taxable

Is Long Term Disability Taxable – Long Term Disability Policy

Group Long Term Disability Policy

Your employer provides group long term disability insurance. If your employer pays your entire premium and does not include the premiums in your taxable income, your benefits are taxable. That means you have to pay income taxes on your disability benefits when your employer pays all the premiums of your long-term disability policy.

If the cost of your long term disability insurance premiums is split between you and your employer, only the portion of the benefits attributable to the employer’s payments is taxable. In this situation, a portion of your disability benefits will be taxable. Your employer’s portion is taxable, whereas your percentage depends on the payment option you chose, post-tax dollars or pre-tax dollars.

You should also determine whether your employer pays with pre- or post-tax dollars. It can change the taxability of your benefits.

Long Term Disability Lump Sum Settlement

You can choose a lump sum settlement instead of intermittent payment plans for your long term disability insurance benefits. With this, you will receive the entire Long term disability benefit at once.

The taxability of a lump sum settlement is determined by the taxation of the premiums paid (pre-tax or after-tax dollars). If your benefits are taxable, you will see a significant reduction in your total benefits by taxes.

State and Local Taxes

All the rules often apply to federal taxes on long term disability benefits. State and local taxability of disability benefits varies by jurisdiction and should be verified with local tax laws. You must understand the taxes before using the benefits to pay other expenses.

The rules can differ depending on the employee’s residence, the area of employment, and the place where your policy is issued. The tax issues can be extremely complicated if an employee does not live and work in the same state.

Never forget to seek tax advice from an expert before spending the benefits on something else.

What Taxes Will You Have to Pay?

Disability benefits can always replace your lost salary. The taxes you have to pay to receive the benefits may be somewhat similar to the taxes you had to pay before as an employee. Disability benefits are not subject to FICA taxes but may be subject to federal income tax, depending on how the premiums were paid.

FICA can collect some of the earnings from the employee and the employer. The amount is generally used to fund Social Security and Medicare. If your disability insurance is subject to taxes, you may have to pay the FICA contributions and the federal income tax on the benefits.


The taxability of your disability benefits depends on multiple factors. It depends on who is paying the premiums and which payment option you use, the post-tax or pre-tax dollars.

See Also

Long Term Disability Lawyer

Medical Conditions Qualify You for Long Term Disability

Signs That You Will Be Approved for Disability

Long Term Disability Insurance

Is Medical Insurance Tax Deductible?

Current Version
December 2, 2022
Written By
Shubham Grover
March 15, 2024
Updated By
Andrea Morales G.

Follow us