Receiving long-term disability benefits can provide essential financial support for individuals facing long-term illness or injury. As tax season approaches, deciphering the impact of these benefits on your tax filing can be a complex task.
This comprehensive guide will help you understand the ins and outs of long-term disability benefits and taxes, so you can confidently file your taxes.
Table of Contents
Determine The Tax Status Of Your Benefits
It’s important to note that not all long-term disability benefits may be taxable. If you or your employer paid your disability insurance policy premiums with after-tax dollars, your benefits are generally non-taxable.
However, if your employer covered the premiums without including the cost in your taxable income, your benefits will be considered taxable.
Be Aware Of The Social Security Reduction
When you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) in conjunction with your long-term disability benefits, your insurance provider may decrease your benefits by the amount you receive from Social Security.
This reduction is referred to as the Social Security offset. Keep in mind that your taxable long-term disability benefits could be further reduced due to this offset.
Calculate Your Taxable Earnings
To figure out your taxable earnings, begin by adding all income sources, including your long-term disability benefits if they are taxable.
Next, subtract any income adjustments, such as alimony payments or student loan interest.
Lastly, subtract your standard or itemized deductions and any relevant tax credits. The resulting number is your taxable earnings.
Review State Tax Regulations
Besides federal taxes, some states also tax long-term disability benefits. Make sure to review your state’s tax regulations to find out if you need to report your benefits on your state income tax return.
If you’re unclear about your state’s requirements, consult a local tax professional or your state’s taxation agency.
Consider Claiming Medical Expenses
If you choose to itemize deductions on your tax return, you might be eligible to claim medical expenses related to your disability.
To be eligible, your total medical expenses must exceed 7.5% of your adjusted gross income (AGI). Qualifying expenses include medical treatments, doctor appointments, prescriptions, and medical equipment. Maintain detailed records of all medical expenses throughout the year to simplify tax filing.
Maintain Thorough Documentation
Keeping extensive records of your disability benefits and any related expenses is vital. In case of an audit, you’ll need supporting documentation for your claims.
Retain copies of all benefit statements, medical invoices, and other pertinent paperwork for a minimum of three years after filing your taxes.
Consult A Tax Professional
Understanding the intricacies of long-term disability benefits and taxes can be challenging. If you’re unsure about your specific circumstances, it may be helpful to consult a tax professional. They can clarify your obligations, make sure you’re taking advantage of all applicable deductions and credits, and minimize your overall tax liability.
Conclusion
Tax filing can be an intimidating process, especially when dealing with long-term disability benefits. By comprehending the tax implications of your benefits, accurately reporting them on your tax return, and seeking expert advice when needed, you can guarantee that your taxes are filed correctly and with confidence.
