Is Disability Insurance Taxable (Tax Deductible) in PA and NJ?

Many of our clients frequently ask if disability insurance payments are tax deductible and if that income is taxable when received. Here, the attorneys of Young, Marr, and Associates provide an overview of the general inner workings of disability insurance for tax purposes. Many of our clients ask accounting questions in order to understand the implications of their legal decisions. We recommend that special attention be paid to the tax-related consequences of recommendations that can impact their lifestyle.

The Pennsylvania and New Jersey social security disability lawyers at Young, Marr, Mallis & Associates break down whether or not disability insurance is tax deductible.

Overview of Disability Deductions

Many people assume that disability benefits are deductible. However, this is only the case for certain types of state-sponsored insurance and private disability insurance. If after-tax income is used to pay for insurance premiums, you are likely to receive insurance income fully or partially tax-free; after-tax income refers to the money left in your paycheck after taxes are taken out.

Here, we give a brief explanation of the types of disability insurance that are deductible. Keep in mind that every time you take a deduction, you need to look at the long-term implications of this deduction in terms of taxes. For some types of insurance, the deduction rests on the notion that taxes will be paid at the point the benefits are distributed. Moreover, even if your benefits are considered tax–free, there are instances when you have to pay taxes if the benefits exceed the premium.  Nevertheless, we always encourage our clients to meet with a tax professional to go over the details of their situation.

Disability deductions are overlooked sometimes because they can be tricky. Although the IRS gives self-employed taxpayers the ability to deduct their overhead insurance, it doesn’t allow the deduction of premiums for lost earnings during sickness-related disability. Every time you pay a premium and don’t take deductions, your income is likely to be tax-free. Some of the types of private insurance include:

Qualified Long-Term Care Insurance 

The premiums for qualified long-term care insurance are deductible on Schedule A of Form 1040. Keep in mind that there are limits based on the taxpayer’s age at the end of the year, and any premiums paid above the limit will not be deductible. The are some restrictions as well in that the policy must cover activities related to daily living and cognitive impairments. 

Individual Disability Income Insurance 

You cannot take deductions for the premiums you pay to get individual disability insurance. However, the benefits’ income will be tax–free.  

Employee–Sponsored Disability Insurance

The tax liability is divided between the employer and employee. You can take partial or specified deductions depending on the type of insurance. If your employer took deductions on the premium, then the income will be taxable to you.

Association or Group Disability Insurance

You cannot deduct the costs of these premiums. However, the benefits are tax–free.

Government Disability Insurance

Most government disability insurance programs are taxable. However, every state has different rules and regulations. In New Jersey and Pennsylvania, you will not pay taxes for state–sponsored disability benefits, but you will be responsible for federal disability benefits such as Social Security.

With Social Security Disability benefits you don’t pay premiums to an insurance company. Instead, you pay Social Security taxes out of each paycheck. This amount paid out of your paycheck is not tax-deductible the way a traditional IRA account is deductible at the end of the year. However, unlike an IRA, you don’t have to allocate a specific portion for tax payments when if you receive the benefits. At the point when you receive your benefits, you may have to pay taxes, depending on your income.

Income-Dependent Social Security Disability Taxes

Your Social Security disability benefits are treated as income for tax purposes. Irrespective of whether a single taxpayer’s income is $25,000, or if their total income exceeds the base amount of $34,000 – $44,000 for married couples filing jointly – they will be responsible for taxes worth either 50 percent of Social Security benefits or one half of the difference between provisional income and the applicable base amount, whichever is less. For a more detailed review, you should talk to a tax professional about your options. Since anyone can become disabled at any age, you need to pay attention if there are age-related income requirements.

Credits Available If You Receive Social Security Disability Benefits

If you receive Social Security disability benefits, you may be able to take a credit to reduce your taxes if you are retired on permanent or taxable disability income and your AGI doesn’t exceed the following amounts: 

• Single heads of household: $17,500 
• Married jointly and one spouse is disabled: $20,000 

• Married jointly and both spouses are disabled: $25,000 
• Married filing separately (and living apart): $12,500

Also, your disability benefits income cannot be equal to or more than: 

• $5,000 for singles or couples where one spouse receives disability benefits 

• $7,500 for spouses filing jointly where both spouses receive disability benefits 
• $3,750 for spouses filing separately (and living apart)

Seeking Deductions for Disability Related Medical Expenses

There are important deductions you can seek for medical expenses related to your disability and impairment-related expenditures. These deductions include expenses related to the purchase of medical equipment and possibly even home renovations related to your disability. 

Property Tax, Rent Rebate, & Utility Discounts If You’re Disabled in Pennsylvania and New Jersey

If you live in Pennsylvania and New Jersey and you receive Social Security disability benefits, you can qualify for an abatement or reduction on your property costs and taxes. New Jersey residents may receive a deduction of up to $15,000 or a refundable credit when filing income tax returns. The attorneys at Young, Marr, and Associates can help you navigate this difficult process. If you have questions about your disability taxes, call us today at (215) 515-2954 in Pennsylvania and (609) 557-3081 in New Jersey.