Temporary invalidity, such as injury, serious illness and even pregnancy, may be covered by short-term invalidity pensions obtained from private insurers and may form part of the employer’s remuneration for employees. Are short-term disability benefits taxable?
What is invalidity insurance?
Disability insurance is a type of insurance providing income in the event that an employee is unable to perform tasks at work due to injury or disability.
Disability insurance is divided into two categories:
- Short-term disability: this type of insurance pays part of your income for a short period – and can last from several months to two years.
- Long-term disability: this type of insurance starts after a waiting period of several weeks or months – and can last from several years to retirement age.
Disability insurance can come from various sources. Disability insurance can be provided by your employer or something you buy from an insurance company.
State taxation of state disability benefits
When it comes to state short-term disability insurance (SDI or TDI), some states tax their residents on temporary disability benefits, so you’re in luck. While California, New Jersey and Rhode Island do not tax state-paid short-term disability pensions, New York and Hawaii partially tax these benefits, depending on how much your employer has contributed to your insurance costs and how much you have added to your insurance costs.
Is disability insurance taxable?
Invalidity pensions may or may not be taxable. You will not pay income tax on invalidity benefits in which you paid contributions in dollars after tax. This includes: the policy you bought for tax dollars.
An employer-sponsored rule that you contributed with after tax dollars. These principles apply to both short-term and long-term disability policies. Income from social security invalidity is not taxable if the temporary income does not exceed the basic amount. Temporary income is modified adjusted gross income (AGI) plus half of the social security benefits received. The basic amount is:
- $ 25,000 if you apply alone, at home or in marriage (all year separately)
- $ 32,000 if you are married by submitting an application together
- $ 0 if you are married by submitting a separate application and living with your spouse at any time of the year