Are Long Term Disability Benefits Taxable?

Long term disability income is taxable in some circumstances. To determine if your long term disability benefit is taxable, you have to know who paid the premium for the long term disability benefit.  Your long term disability benefit is taxable if it is a benefit provided to you by your employer, unless you pay for the premium in full. In this case, the long disability income is not taxable. Your long term disability benefit is taxable if the premium is paid by your employer and not included in your employment income. If the long term disability premium is paid by your employer, but it is included in your employment income, then any disability income you receive is not taxable. When the long-term disability premium is shared by you and your employer, you are entitled to tax-free long term disability benefits equal to your contribution to the premium; however, the remainder is a taxable benefit. If you are self-employed and you bought the disability insurance policy with after tax dollars, the long term disability income is not taxable.

Long Term Disability insurance plans provide income protection in the event that you cannot work due to a serious illness of injury. Long term disability benefits normally start after a specified qualifying period, meaning you have to wait a certain amount of time after disability onset to start receiving the benefit. During this qualifying period many people are covered by a short-term disability plan. Long term disability benefits cover a percentage of your salary or wages. Depending on your policy, your long-term disability plan will typically pay between 50% and 80% of your pre-disability earnings, up to a maximum dollar amount.

If you’re lucky, your plan may allow for a cost-of-living adjustment, which means your monthly benefit will be increased yearly in accordance with increases in the cost of living, usually up to a maximum percentage. The terms of your policy will dictate how long your benefits will continue. Many plans pay benefits until the age of 65 provided you are eligible for the long term disability benefit. Your plan will provide you with a definition of disability that you have to meet in order to receive long term disability benefits. You will also be required to obtain ongoing medical treatment while receiving the benefit.

In the event that your long term disability benefits are terminated or your claim for long term disability benefits is denied and you pursue a law suit against your long term disability insurer for an improper denial or termination of long term disability benefits, there may be a tax advantage to a lump-sum settlement if your disability income is taxable. If you settle your long term disability benefits claim, the portion that is for past long term disability benefits up to the date of settlement will be reported to the Canada Revenue Agency as income. The portion, if any, for future long term disability benefits (after the date of settlement) does not have to be reported to Revenue Canada as income. Consulting an experienced disability lawyer can help you through this confusing process.