Social Security Disability - Up to 85% of SSDI benefits can be taxable, depending on the recipient's level of "provisional income." But most folks pay no taxes on the benefits because they don't have much other income. Private Disability Policy - If you directly purchase a disability policy from an insurance company and have an eligible claim, the benefits will be non-taxable. That's because you paid the premiums with already-taxed dollars. Group Disability Policy Through Work - If you collect on an employer-provided group disability policy, the benefits will be taxable. On the other hand, if it's a group policy, you can choose to participate or not, and your participation is funded through your own after-tax payroll deduction, then the benefits will be non-taxable.
This is an interesting question that financial professionals deal with on an ongoing basis. The key to whether disability is taxable has to do with "who paid the premium" for the disability benefit. In other words, if the benefit was paid entirely by your employer through some kind of group insurance policy, the receipt of disability benefits is in fact taxable. If on the other hand, you paid the premium yourself with after-tax dollars, then the disability income is 100% tax free to you. Hope this helps. Good luck
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