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Question for the Money Doctors

Question submitted on Apr 15, 2014.

Question

Hi I have a question about my private insurance disability long term benefits. My benefits were paid for by me 100% with zero participation by my employer, but they did take out the premiums before tax. This small savings seemingly has left me on the hook for thousands in fed income tax, unless I have been filing wrong. Is my disability paid 100% by me?

Answer

You may have had someone come around the office and sell individual policies that were run through your payroll. In this case, disability income insurance has the option to have it taken out pre-tax through a cafeteria plan, or post tax. I always recommend post tax as any benefit would be tax free.

If it comes out pre-tax, any benefit is fully taxable. Some allow options to pay premiums splitting them on a pre-tax and a post-tax basis.

You may not be able to change how the disability payments are paid during the year, as cafeteria plan decisions are made prior to the start of the year. However, if you can, you may want to switch if not now, when you can annually. Generally, the disability income benefits are tax free to the extent that you have paid premiums with post tax dollars with the remainder being taxable when benefits are received.

If you would like to have the assurance that benefits received would be tax free to the extent your premiums were paid on a post-tax basis, switch to having your payments taken out after-tax.


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