Whether you report long-term disability on your taxes depends on who paid the premiums

Long-term disability (LTD) is taxable income if your employer paid the premiums with pre-tax dollars. It is not taxable if you paid the premiums yourself with after-tax money. The difference matters because the IRS taxes the same dollar twice if you are not careful — once when your employer deducted the premium cost, and again when you receive the benefit.

Your employer or the insurance company will tell you which situation applies to you. They send a form called a 1099-R (or sometimes a W-2) that shows how much LTD you received and whether it is taxable. If the box marked "taxable amount" contains a number, you owe income tax on that amount. If it is blank or zero, you do not.

This is separate from Social Security Disability Insurance (SSDI), which has its own tax rules. SSDI is only taxable if your combined income exceeds certain thresholds, and the calculation is more complex. LTD follows a simpler rule: taxable or not based on who paid the premium.

Key Takeaways

  • LTD paid by your employer using pre-tax dollars is taxable income and must be reported on your tax return.
  • LTD you paid for yourself with after-tax money is not taxable, and you should not report it as income.
  • Your insurance company will send you a 1099-R or W-2 showing the taxable amount, if any.
  • If you receive both LTD and SSDI, each has separate tax rules and you may owe tax on one, both, or neither depending on your total income.

How to know if your LTD premiums were pre-tax or after-tax

Check your most recent pay stub or benefits statement from when you were working. If your employer deducted the LTD premium before calculating your taxable income, it was pre-tax. You will see it listed separately from your gross pay, often labeled as "disability insurance" or "LTD premium." Pre-tax deductions reduce the amount of income shown on your W-2.

If you paid the premium yourself — either through payroll deduction after taxes were already taken out, or by sending money directly to the insurance company — it was after-tax. After-tax premiums do not appear on your W-2 as a deduction. You may have receipts or statements from the insurance company showing you paid out of pocket.

When in doubt, contact your former employer's human resources or benefits department. They can tell you in one call whether the premium was deducted before or after taxes. You can also call the insurance company directly; they have records of how the policy was set up and funded.

What to do when you receive the 1099-R or W-2

The insurance company or your employer will mail you a 1099-R (or W-2 if LTD was paid through payroll) by January 31 of the year after you received the payments. This form shows the total amount of LTD you received in box 1, and the taxable amount in box 2a. If box 2a is blank or shows zero, none of your LTD is taxable.

If box 2a shows a number, that is the amount you report as income on your tax return. You will enter it on the line for "other income" or "taxable distributions" depending on which form you use (1040, 1040-SR, or others). Keep the 1099-R or W-2 with your tax records in case the IRS asks questions later.

If you do not receive a 1099-R by early February, contact the insurance company or your employer when ready. You cannot file your return without it, and filing late can result in penalties even if you are owed a refund.

LTD and SSDI together: how the taxes work

If you receive both long-term disability and SSDI, you report them separately on your tax return. The LTD follows the pre-tax or after-tax rule described above. The SSDI follows a different rule based on your "combined income," which includes your LTD, any wages, interest, dividends, and half of your SSDI benefits.

This means receiving LTD can push you over the SSDI tax threshold and make some of your SSDI taxable, even if SSDI alone would not be taxable. For example, if you receive $20,000 in taxable LTD and $15,000 in SSDI, your combined income may be high enough that part of the SSDI becomes taxable. The exact amount depends on your filing status and other income.

Because the two programs interact, it is worth having a tax professional review your situation if you receive both. The Social Security Administration publishes worksheets to calculate SSDI tax liability, but they are complex and straightforward to get wrong. A CPA or tax preparer familiar with disability income can often save you money by catching deductions or credits you might miss.

What happens if you do not report taxable LTD

If your 1099-R shows a taxable amount and you do not report it on your return, the IRS will eventually notice. The insurance company sends a copy of the 1099-R to the IRS, and their computers match it against your filed return. If the income is missing, you will receive a notice asking you to explain or pay the tax owed plus interest and penalties.

The penalty for not reporting income is usually 20 percent of the unpaid tax, plus interest that compounds daily. If the IRS determines you did this intentionally rather than by mistake, the penalty can be higher. It is always cheaper to report the income correctly on time than to deal with an IRS notice later.

If you made a mistake on a previous year's return, you can file an amended return (Form 1040-X) to correct it. The IRS generally does not penalize you if you file the amended return before they contact you, though you will still owe the tax and interest.

State income tax and LTD

Most states follow the federal rule: if LTD is taxable for federal purposes, it is also taxable for state purposes. However, a few states do not tax disability income at all, regardless of whether the premiums were pre-tax or after-tax. These states include California, Louisiana, New York, and a small number of others.

If you live in one of these states, you may not owe state income tax on your LTD even though you owe federal tax. Check your state's tax agency website or call them directly to confirm. The rules can change, and some states have income limits or other conditions that affect whether disability income is taxed.

Frequently Asked Questions

Can I deduct the LTD premiums I paid myself on my tax return?

No. If you paid LTD premiums with after-tax money, you cannot deduct them on your return. The benefit of after-tax premiums is that the LTD you receive is not taxed again. You get the tax break when you pay the premium, not when you collect the benefit.

What if my employer paid part of the premium and I paid part?

The insurance company will split the taxable amount on your 1099-R. The portion your employer paid with pre-tax dollars is taxable; the portion you paid is not. The form should show this breakdown, or you can ask the insurance company to explain it.

Do I have to report LTD if I did not receive a 1099-R?

If the insurance company did not send you a 1099-R, contact them and ask why. They are required to send one if the LTD is taxable. If they confirm the LTD is not taxable, you do not need to report it. Get their confirmation in writing and keep it with your records.

Will receiving LTD affect my SSDI benefits?

LTD does not reduce your SSDI payment amount. However, if you are under full retirement age and receiving SSDI, earning more than the annual earnings limit can reduce your benefits. LTD is usually not counted as earnings for this purpose, but you should confirm with Social Security because the rules depend on how the LTD is structured.

Should I set aside money for taxes on my LTD?

Yes, if your 1099-R shows a taxable amount. The insurance company does not withhold taxes from LTD the way an employer withholds from a paycheck. You are responsible for paying the tax when you file your return. If your LTD is large, you may want to set aside 20 to 30 percent of each payment to cover federal and state taxes.