Should my long term disability benefits be taxed in Illinois? No state taxes were withheld for LTD only partially funded by my employer.

[double_g_76]

My long term disability benefit was partially funded by me and the rest was employer paid. I was under the impression IL did not tax LTD, even though the portion paid by my employer is federally taxable. How do I reflect that in Turbo Tax?

[ThomasM125]

You should enter your form 1099-R that reports the distribution in the federal section of TurboTax, in the Wages and Income section, then Retirement Plans and Social Security, then IRA, 401(k), Pension Plans (1099-R). The taxable amount should be listed in box box 2(a) and the code in box 7 should designate it as being a disability pension (code D.)

When you prepare your state tax return for Illinois, you will see a section that says Here's the income that Illinois handles differently. In that section there is an option to work on your retirement income, you need to work through that section to insure that your pension income isn't taxable on your Illinois tax return.

[double_g_76]

The LTD insurance benefit was paid out on a W-2.

[DaveF1006]

According to this State of Illinois website, Disability benefit is considered income and is subject to federal income taxes. However, disability benefits are not subject to Illinois state income taxes.

Here is how to make it non-taxable in Illinois assuming the W2 in question just reported the LTD benefit and no other income.

1. Begin by preparing your Illinois state return.
2. When you get to the page that mentions Here's the income that Illinois Handles Differently
3. Scroll to the bottom of the page to miscellaneous>any other additions>start
4. For a description, type in LTD benefit paid on W2-Non taxable in Illinois
5. Enter the amount of the W2 as a negative number. For an example, if the amount is $10,000, you will enter it as -10,000. 

[double_g_76]

First, thank you for responding! When I try to enter a negative number, I receive an error that it must be at least zero. Do you know a way around this?

[DianeW777]

Another way to handle it that should resolve the issue is to go back to the W-2 and change the State amount (Box 16) to the amount that should be taxed by Illinois (IL).  The key is to report the accurate taxable wage to IL. 

As indicated by our awesome Tax Expert @DaveF1006 the disability benefits are not subject to Illinois state income taxes

Please update if you need further assistance.

[Nick23]

I realize this thread was from 2022. I have this same question for Illinois and none of these answers fix the issue currently. 

My spouse receives Long Term Disability payments as “third party sick pay.” We receive a W-2. The LTD benefit was paid by her employer prior to receiving it. 

Boxes 1, 2, 15, and 16 have a number populated 

[DavidD66]

It looks like you cannot made an adjustment on your Illinois tax return to subtract the amount of Long Term Disability income reported on Form W-2.  The Illinois form for making adjustments to income is "Schedule M, Other Additions and Subtractions for Individuals".  All allowed subtractions are explicitly listed on the form (i.e. there is no miscellaneous or other subtractions option).  This is the case in TurboTax as well as the paper form.  In addition, the instructions for Schedule M, under "What other income is not allowed as a subtraction?" states:  You may not subtract anything that is not listed on Schedule M. For example, you may not subtract:

• any wages reported on your federal return. If you believe the wages reported on the Form W-2, Wage and Tax Statement, you received from your employer are incorrect, you must obtain a corrected Form W-2 or a statement from your employer, on company letterhead, stating that your Form W-2 was incorrect. We will not accept a letter from you or your tax preparer.

Illinois may not consider LTD payments to be taxable, but because the third party payer included them as State Wages on the W-2 you will have to either include them in your income and pay state income tax on the amount, or have your employer or the third party payer issue a corrected W-2 or provide you a letter saying that your W-2 was incorrect.

[jly52]

Hello DavidD66!

Thank you for continuing to address this thread. I also receive LTD benefits from a third-party insurer reported on a W2 as third-party sick pay. I had been paying IL state taxes on my sick pay until 2024 when my insurer informed me that they had been erroneously been withholding and remitting taxes to IL (my state of residence) instead of TX (the state I worked in when I became disabled). They stopped withholding for IL and I was able to file amended returns to get back the last three years of taxes paid to IL. However, I'm struggling with how to file IL taxes going forward to indicate that the third-party sick pay should not be taxed. If I understand your previous answer my LTD insurer should leave box 16 blank. What language do I use to explain to them how and why they need to correct my W2?

[DavidD66]

You need to explain to them that Long Term Disability benfis are non-taxable in Illinois and therefore should not be included on the tax return.  Illinois does not provide a way to deduct the amount on the tax return if it is reported on the W-2 as Illinois income.   

[jly52]

Hello Again, David

I just need some clarification of your last answer. You said that "Illinois does not provide a way to deduct the amount on the tax return if it is reported on the W-2 as Illinois income." But, what if the W-2 reports TX income? My W-2 lists Box 13: Third-party sick pay, Box 15: State/Employer's state ID TX, Box 16: State wages, tips, etc $43,000, Box 17: $0.00. 

So, I'm getting a TX W-2 (because my benefits are based on my years working in TX), but I now live in Illinois. I asked my LTD company for a corrected return leaving box 16 blank and their response was, "Although, there is no income tax for the state of Texas, we have to include the income paid in Box 16. You will continue to see an amount  Box 16 , annually. Since Texas in a non-income tax state, there is nothing to report. The W2 is in accordance with IRS guidelines."

Until last year my LTD company was erroneously reporting my income to IL instead of TX, but they have corrected that. I was also paying estimated taxes to the state of IL until July of last year. Illinois refunded my last 3 years of taxes after I filed amended returns, so they would seem to agree that I do not owe IL taxes on my benefits. However, I have been told that in order to get Jan-July of 2024 taxes back, I have to file an IL return and that even going forward that I have to file an IL return because filing a federal return will trigger a notice for IL.

How would you handle filing taxes to recoup the estimated taxes for 2024? Going forward, is it true that I still have to file an IL return even though no income is being reported to the state? And the income that I have would be exempt anyway because it is all LTD benefits?

I know this is a lot, but I am really struggling and I could use some help. Thanks.