Are Short-Term Disability Payments Taxable Income?

Short-term disability benefits may be taxed as regular income.

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There are times in life when unexpected sickness or injury can take its toll on your economic well-being. In situations where you have sustained some form of debilitating medical condition and have exhausted all available sick days from their work, short-term disability insurance can be used to ensure that income continues to arrive, even though you are unable to fulfill your professional duties.

While short-term disability insurance does provide a priceless economic lifeline in your time of need, you may be forced to pay tax on this money in specific scenarios. Understanding when short-term disability taxable income is collected can help you plan a smart financial strategy for yourself, which ensures that you'll have access to important resources during your time of need.

Tip

Short-term disability income payments may be taxable if you receive funds that have not yet been subjected to taxation. Also, your payments will be taxed if your provision income level exceeds the IRS base amount for your particular filing status.

Taxation Depends on Funding and Income

The source of your short-term disability payments will prove to be the most concise way to determine whether you will owe tax on this income. Generally speaking, short-term disability insurance plans that were funded using posttax dollars from either you or your employer will not be taxed. This is due to the fact the money you are setting aside for your insurance has already, in effect, been taxed by all relevant parties.

That being said, if your employer paid short-term disability coverage for you with pretax dollars, you will likely be required to pay tax on this income once you begin receiving payments.

If you are receiving income as part of Social Security disability, these funds will only be subjected to taxation if your provisional income is more than the base amount. Provisional income can best be defined as your modified adjusted gross income plus half of all Social Security benefits you receive. The base amount can be defined as an IRS-mandated income level, after which point benefits become taxable. For single filers, the current IRS base amount is $25,000. This same sum applies to individuals who are able to claim themselves as the head of their household. Couples who are married and filing jointly have a base amount of $32,000.

Using this information, you can quickly determine whether or not you will qualify for tax-free status on these funds. If you do qualify for tax-free status, you should still keep concise and accurate documentation of any payments received in the event of increased IRS scrutiny at any point.

Exceptions to Disability Payment Taxation Requirements

If you have paid into a worker's compensation fund, this income will be exempt from taxes as long as the injury or illness causing your absence from work can be sourced to your employment. Worker's compensation, is, however, technically not a form of short-term disability insurance, which means that the rules governing the former will not necessarily apply to the latter.

If you are interested in exploring long-term disability taxable vs. nontaxable alternatives, it is recommended that you consult either with your employer or a financial adviser. These individuals can help you determine which specific course of action will best serve your interests and ensure that you receive the financial support you require.

Reporting Your 2018 Taxes

If you are required to pay tax on your short-term disability income, you can do so using IRS Form 1040 as well as Form W-4S. These documents will help ensure that you thoroughly account for any and all funds you receive as part of your disability payout and, consequently, will keep you clear of IRS penalties. As always, it is strongly recommend that you consult with a tax professional if you have any additional questions concerning how you should properly file your taxes with respect to your short-term disability payments.

Changes from 2017 Tax Law

Generally speaking, the rules governing short-term disability income taxation have not changed from tax year 2017 to 2018. That being said, IRS Form 915 detailing the base income amount for taxation exemption on disability payments will be released in early 2019.

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About the Author

Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.


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