Federal Tax Rules for Short Term Disability Income

You can exclude short-term disability payments from taxable income under certain situations.

You can exclude short-term disability payments from taxable income under certain situations.

Whether or not you have to pay taxes on short-term disability benefits you get depends on who pays the insurance premiums – you or your employer. It also makes a difference if the premiums were paid with before-tax or after-tax dollars and if you paid a disability insurance deductible. But are short term disability payments taxable? As a general rule, when you have to report your disability payments as income, the IRS is going to expect you to pay taxes on the benefits you receive. The guidelines apply to either short-term or long-term disability benefits.

When Short Term Disability Payments Aren't Taxable

If either you or your employer pays the premiums for an insurance plan before payroll taxes are deducted from your wages, you will need to report any disability payments you receive as income. If your employer kicks in and pays part of the insurance premiums for a disability plan and then doesn’t dock the premiums it pays from your wages, you’ll likely have to report at least a portion of the payments you receive. When tax time comes and you aren’t sure how to handle disability payments, check Box 1 on your W-2 form. This is where your employer reports your wage and salary information. If the box includes disability payments your employer paid in your gross income, you must report the payments as taxable income – as long as your employer pays for the coverage in part or in full. When employers provide disability benefits to employees and pay entirely for the coverage, then federal, state and local taxes are withheld from the benefits you receive. It doesn’t matter whether you file a claim with a short- or long-term disability plan. Although the benefits you receive are taxable, you can’t deduct employer paid disability insurance as an itemized medical expense on your federal tax return.

When Short Term Disability Payments Aren't Taxable

If you foot the cost of insurance premiums for a disability plan out of your own pocket after taxes are taken out of your paycheck, you don’t have to report any disability payments you receive as income. The benefits are tax-free. If you receive insurance payments as reimbursement for medical expenses, you don’t have to report the payments as income. But being reimbursed for medical expenses will reduce the dollar amount of medical expenses you can deduct on your income tax return if you itemize rather than taking the standard deduction. You must include as taxable income any payments you receive as reimbursement that give you more money than your medical expenses actually cost.

2018 Tax Law Changes

The new tax laws have brought a few Social Security disability tax questions. However, the only tax law changes that apply to disability benefits relates to the income threshold for long-term benefits, which increases from $1,170 to $1,180 in 2018. Blind disability recipients can make up to $1,970 and still receive benefits, up from $1,950 in 2017. The payouts are also increasing to $750 for an individual and $1,125 for a couple. However, Social Security doesn't make payouts for short-term disabilities, so this will only affect you if your disability becomes long-term and you qualify for Social Security benefits. If you have medical expenses that weren't covered by insurance, you may be able to claim them under itemized deductions. However, in 2018 the standard deduction is increasing substantially from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples, so you may find these deductions don't exceed the standard.

Under the 2017 Tax Law

As in previous and current years, for 2017 you should report only the income you received from your employer for your short-term disability. All taxable income should be reported on Form W-4S, Request for Federal Income Tax Withholding From Sick Pay.

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About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.

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