How to Keep Your Disability Income Tax-Free
If you’re receiving disability income, it’s important to understand how this type of income is taxed. There are ways to manage it so that it remains as tax-free as possible. But before we dive in, let’s clarify a crucial point: Tax laws can change. You will want to consult with your tax professional or financial advisor to understand how current rules apply to your situation. Now, let’s get to the heart of the matter.
Understanding The Basics: Taxable vs. Non-Taxable Disability Income
Not all disability income is taxable. Typically, the taxability of your disability income depends on who paid for the disability insurance coverage.
If you paid the premiums on a disability insurance policy with after-tax dollars, then the benefits you receive are not taxable. On the other hand, the benefits are taxable if your employer paid for the coverage or if you paid the premiums with pre-tax dollars.
Federal Disability Benefits: SSDI and SSI
Social Security Disability Insurance (SSDI) benefits may be taxable, but it depends on your total income and marital status. If Social Security is your only income source, your benefits are typically not taxable. However, your benefits are taxable if you have additional income that puts you above the federal threshold.
Supplemental Security Income (SSI), on the other hand, is not taxed. That’s because SSI is a needs-based program for people with little to no income or resources.
Planning for Tax Efficiency: Some Practical Steps
Let’s explore some strategies that can help ensure your disability income remains as tax-free as possible.
1. Pre-tax vs. after-tax planning: Before opting for an employer’s disability insurance coverage, consider whether you’d prefer to pay the premiums with after-tax dollars to ensure any potential benefits are tax-free.
2. Careful income management: If you receive SSDI benefits and have other sources of income, manage these carefully. There may be ways to limit the taxable portion of your SSDI benefits by strategically managing your other income sources.
3. State considerations: Understanding state-specific tax laws could help maximize your benefits. Consulting with a financial advisor and tax professional knowledgeable about your state laws can be hugely beneficial.
Remember, these tips are general guidelines, and everyone’s situation is unique. The path to keeping your disability income tax-free can be a complex journey, and having a trusted professional by your side can make a difference.
For example, our Registered Investment Advisor firm, based in Roseville and Folsom, CA, and Lehi and Logan, UT, helps clients understand their disability income and benefits as part of their ongoing wealth management services.
Final Thoughts
Understanding the intricacies of tax laws concerning disability income can feel daunting. Remember, the key is to plan, review, and adjust as necessary.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was generated using artificial intelligence (ChatGPT) and edited by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.