Disability income may be taxable depending on a number of factors. If you are paid 100 percent of your disability insurance with after-tax dollars, it is not taxable. If your employer paid the premiums or you paid the premiums with pretax dollars, it is taxable. Most times if your disability checks are processed through your employer, withholding of federal and state taxes is typically done, if necessary, before you get your check.
Determine if you owe taxes on your disability income. If you are not sure who paid your insurance premiums, call your human resources office. If you don't owe any taxes, your job is done. If you do owe taxes, read on.
Confirm whether federal and state taxes are being withheld. You will usually see this on your pay stub when you receive it. If taxes are being withheld, you are done. Your disability income tax has been paid. If for any reason you are overtaxed, you will receive a refund when you file your income tax return.
If taxes are not withheld, be prepared to pay when you file your tax return. The easiest way to do this is to use tax preparation software such as TurboTax or TaxAct. The tax on your disability income is automatically calculated. Some software versions are free, depending on your income level.
Repeat the process for state taxes. State regulations differ on how disability income is taxed. For example, in Virginia up to $20,000 of disability income is nontaxable. See a link in Resources to state taxing authorities. Make sure you also use tax preparation software to compute your state income tax when you file your state return.
- If you receive Social Security disability benefits you may need to pay income tax. If you file a return as an individual with a combined income between $25,000 and $34,000, 50 percent of your Social Security benefits is taxable. If your combined income exceeds $34,000, 85 percent is taxable.
- Creatas/Creatas/Getty Images