Income Taxes on Long Term Disability Leave

[CSKang]

I received the maximum amount of short-term and long-term disability leave benefits from my employer due to an unfortunate personal incident in early 2021. The short-term leave offered by my employer was a maximum length of 6 months, starting in 7/21 and ending 12/21. The benefit payments for my short-term leave had federal and state income tax removed prior to me receiving the payments. The long-term leave offered was a maximum of 12 months and started 1/22 and ended 12/22, and these payments did not have any income tax applied or removed prior to me receiving payments. I am unsure of how to and how much taxes to apply to the long-term benefits payments I received throughout 2022, because I am not receiving conclusive answers from my employer and the third-party insurance company that worked with my employer to provide the monthly payments. They are unable to provide me with an explanation as to why federal and state income taxes were not deducted from my long-term disability payments. I read somewhere, if you receive disability benefit payments for 6 consecutive months, the subsequent disability benefit payments from an employer are not subject to either federal or state income tax afterwards, but I'd like to be certain. Just to provide some more background information on myself, I am a resident of New York and would be filing as a single person. As no federal and state taxes were deducted in 2022, I used on online tax calculator to determine the maximum projected amount of federal and state income taxes based on the long-term disability benefit payments I received, paid that estimated amount through TurboTax online in April 2023, and filed for an extension while I gathered more information. Unfortunately I was unable to find any answers. Please reach out if there are any details that would help in finding a solution to this conundrum. Thank you!

[ClarissaA]

Long term disability payments are complicated.  You were smart to file the extension and make the estimated tax payments.  

Officially the answer as to whether it's taxable income or not is "it depends."  The source of the premiums paid for that disability policy is what determines whether you pay taxes on the income received.  

If your employer paid 100% of the premiums, it's taxable income for you.  If you paid 100% of the premiums with AFTER-tax dollars, its not taxable.  If you paid the premiums with PRE-tax dollars, then it is treated as if your employer paid the premiums, and the income is taxable for you.  
IRS Disability Insurance FAQs 

In your case, you need to look back at your original long term disability insurance benefits and determine how those premiums were funded.  Use that information to determine if you need to pay taxes on the income received.  

I hope this helps! 

[CSKang]

Thanks Clarissa, I've provided some more background information because I'm a bit more confused and I need advice on what actions to take next. I have already requested clarification on the last question concerning who funds the insurance premiums from my employer and the third-party they used, and unfortunately haven't gotten a clear answer from either.

My former employer is a health insurance company. All insurance premiums and deductions before and during my short-term disability leave were already applied by my employer prior to receiving any payment/paychecks. I was also enrolled in my employer's/company's health, dental, vision, life insurance plans, etc. The checks I received for my short-term disability payments were sent by the third-party vendor used by my employer, but according to payroll documents, were funded by my employer.

During my long-term leave however, no deductions were made (such as medical, dental, vision, life, disability, retirement, state and federal income taxes, Social Security, etc.) and I paid out-of-pocket for my medical insurance premiums. The checks I received from the third-party vendor may have been funded by the third-party as payroll documents don't show any movements in earnings and deductions for them majority of 2022. Please let me know if there are any details that I could include that may help find a resolution.

Thanks again!

[Shar6]

I’m in a similar situation with conflicting information between my former employer, and their third-party disability insurance provider Equitable. However, I received a W-2 for 2022 as below 

- Box 1  only shows a portion of the income I received as total Ltd payments.(24k)

- Box 12 letter J (72k)

- Box 13 x 3rd party sick checked

- Box 14 3rd party sick (24k)

Im also told I’m not taxed for Ltd from my employer and was only taxed last year for STD 3 months: 9 months of Ltd was not taxed last year 

[Shar6]

TT is taxing me $1160.. 

[alkipa]

Hi Clarissa,

I have a related question.  Based on the info you provided above and some other info from the IRS website, I've already established that the LTD payments I received last year should not be taxable.  However, the LTD insurance company has indicated that they will still issue a W-2 form.  What boxes (or fields) on it would indicate that the LTD payments should not be taxable?  I just hope I won't have to send my pay stubs to IRS to prove that because I was hoping to be able to submit my tax return electronically like I did last year.

Thank you.  - Al

[RobertB4444]

If you are certain that your LTD income is not taxable then you should not include it in your tax return.  You should also not receive a W2 so wait until you do before you stress out - the income may be left out of box 1 showing it as non-taxable for the year anyway.

Since it is non-taxable then you should leave it off of the return.  But gather documents supporting your position and keep them just incase.  These should include pay stubs showing that you paid the long term disability insurance premiums through a post tax deduction or proof of payment to the insurance company if the premiums were paid separately.  

For any other questions this IRS FAQ is very helpful when it comes to the taxability of long term benefits.

@akiperman 

[gohlkedi]

My long term disability was paid 100% by my employer.   Do I enter that income like a regular W-2 on my tax form?  Should I be receiving all of that information from the insurance company in order to complete my tax forms?