Long-Term Disability Through Employer vs. Individual Plans in WI
Sorting Out How Much Financial Relief You Get to Keep
Benefits from long-term disability insurance (LTD) help you cover medical costs, pay for everyday expenses, and secure a more stable life when a debilitating medical issue forces you out of work.
You’re grateful to have it. But do you get to use all of it? Do you have to pay taxes on long-term disability benefits?
It’s a natural question. The answer, however, can be a bit confusing.
In essence, it depends on how you or your employer paid for your LTD insurance in the first place.
After all your effort to file for long-term disability and fight the insurance company to get the full benefits you’re entitled to receive, the last thing you want is more complications.
The Wisconsin long-term disability lawyers at Becker Law Office and Hawks Quindel field this question from clients all the time.
We want to be clear: We’re not tax professionals. We help people get their long-term disability benefits in the first place. But we prepared this page to help you get an idea of what to expect with long-term disability insurance and taxes.
Our Wisconsin long-term disability attorneys have decades of experience helping thousands of people.
Keep reading for more on when you have to pay taxes on long-term disability benefits.
Taxes on Group LTD Plans vs. Individual LTD Plans in Wisconsin
Understanding if your long-term disability insurance benefits are subject to taxes begins with the type of policy you have: individual or employer.
Who paid the premiums and how determines what portion of your benefits is taxable.
In general, Wisconsin follows federal rules when it comes to state taxes. If the IRS can tax your benefits as income, then so can the state.
To begin, it’s best to understand the types of LTD plans available. Here are three basic scenarios that cover LTD insurance plans:
- Individual Plans: You bought your coverage through an insurance agent on your own. This is often more expensive, but it can lead to higher benefits because the plan can be customized to your needs.
- Group Plans Through Your Employer: Your employer purchased this plan for their employees and covers all the premiums.
- Group Plans with Shared Premiums: Your employer provided access to a group plan where both you and your employer each pay for a portion of the premiums.
Once you identify which scenario fits your situation, two factors determine what you may pay in taxes:
- What portion you and your employer each paid in premiums
- Whether you paid those premiums before or after taxes were deducted from your paycheck
The bottom line is that you don’t pay taxes on long-term disability benefits you paid for yourself with money you already paid taxes on. But you do pay taxes on benefits paid by your employer or with your own income before it was taxed.
Breaking it down gets complicated. We go into further detail below, but if you have any questions about your individual long-term disability insurance benefits, the Wisconsin long-term disability lawyers at Becker and Hawks Quindel can answer talk to you.
It’s free to have an initial consultation with us.
How Taxes Impact Your Long-Term Disability Insurance Benefits
In every case of long-term disability insurance, you will owe taxes on your benefits if any portion of the premiums were paid before taxes were deducted.
The following are the typical tax buckets that long-term disability plans fall into.
You will owe taxes on 100% of your benefits if:
- Your employer paid all the premiums.
- Your employer paid a portion of the premiums, and you covered your share with pre-tax dollars.
- You paid the premiums on your individual plan with pre-tax dollars.
You will owe taxes on a portion of your benefits if:
- Your employer paid some premiums, and you paid your portion for a group plan after taxes were deducted. In this case, you only pay taxes on the percentage of your benefits that matches the percentage your employer paid in premiums.
None of your benefits are taxable if:
- You paid premiums for your individual plan with post-tax dollars.
The complexity of LTD insurance plans, and the stubbornness of insurance companies, are two major reasons people seek help from a long-term disability attorney.
At Becker and Hawks Quindel, our attorneys are determined to help Wisconsinites maximize their benefits and get every dollar they deserve to move forward with more financial security.
Regardless of what you’ll pay in taxes on long-term disability, work with us to claim financial relief to begin with, especially if the insurance company is resisting you.