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..