Avoiding tax on disability benefits

June 20, 2008

I have disability insurance through my employer and may soon have to file a claim. Will I owe tax on the proceeds?

I have disability insurance through my employer and may soon have to file a claim. Will I owe tax on the proceeds?

You'll owe federal tax if your employer paid the premium for the policy. But if you paid part or all of it through a cafeteria plan and your employer included the premium cost in your taxable income, the amount of the benefit proportional to your payments will escape federal tax. On the state level taxation of disability income varies, so check with your state's department of taxation or an accountant for clarification.