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Disability Insurance Benefit Taxable?

Good day. My wife will be going on leave from her work and taking medical disability income for a few months. I am trying to figure out if the disability income will be taxed during our tax filing if she doesn't have taxes deducted on every disability check?

 

Ultimately, I want to understand what our financial impact will be come tax time?

 

We live in northern California.

1 Best answer

Accepted Solutions
Hal_Al
Level 15

Disability Insurance Benefit Taxable?

Q. Do I need to report my disability insurance benefits  for tax purposes? 

No, your Disability Insurance (DI) benefits are not reportable for tax purposes. However, if you are receiving Unemployment Insurance (UI) benefits, become unable to work due to a disability, and begin receiving DI benefits, a portion of your DI benefits will  be reported for tax purposes.

If this happens, EDD will send you a notice with your first benefit payment. This notice will tell you that your benefits are being reported to the IRS. In January they will provide you with a 1099G form showing the reportable amounts paid (no more than your original UI maximum). They will also send a copy of the 1099G to the IRS.

 

Reference: https://edd.ca.gov/en/disability/faqs-benefits-payments/#:~:text=No%2C%20your%20Disability%20Insuran....

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7 Replies

Disability Insurance Benefit Taxable?

If your wife is not paying for the disability insurance premiums with after-tax dollars, then the disability insurance payments are considered taxable income. For the first 12 months, they are considered income earned from working and are subject to Social Security withholding as well as federal and state income tax. She will probably get a W-2 from the insurance payer. If the disability last longer than 12 months, it will no longer be considered earned income and the Social Security withdrawals will stop, but the payments will still be subject to federal and state income tax. 

Disability Insurance Benefit Taxable?

Based on her understanding, disability payments will come from EDD (Employement Development Department) in California. Does this change anything?

Hal_Al
Level 15

Disability Insurance Benefit Taxable?

Q. Do I need to report my disability insurance benefits  for tax purposes? 

No, your Disability Insurance (DI) benefits are not reportable for tax purposes. However, if you are receiving Unemployment Insurance (UI) benefits, become unable to work due to a disability, and begin receiving DI benefits, a portion of your DI benefits will  be reported for tax purposes.

If this happens, EDD will send you a notice with your first benefit payment. This notice will tell you that your benefits are being reported to the IRS. In January they will provide you with a 1099G form showing the reportable amounts paid (no more than your original UI maximum). They will also send a copy of the 1099G to the IRS.

 

Reference: https://edd.ca.gov/en/disability/faqs-benefits-payments/#:~:text=No%2C%20your%20Disability%20Insuran....

Disability Insurance Benefit Taxable?

Thank you for the clarity @Hal_Al . Just to confirm, disability insurance is not reportable for tax purpose both to the state of California and the IRS

Hal_Al
Level 15

Disability Insurance Benefit Taxable?

Q. Just to confirm, disability insurance is not reportable for tax purpose both to the state of California and the IRS.

A. If EDD determines that your disability insurance is not reportable, then that applies to both federal and CA returns. 

Disability Insurance Benefit Taxable?

Thank you again. A follow-up question. What is the criteria for EDD to determine if my wife's disability insurance is not reportable?

Hal_Al
Level 15

Disability Insurance Benefit Taxable?

It appears that it is usually not reportable.  But, you'll have to ask them, to be sure, based on your situation.  The web site may have more info. 

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