One Simple Trick to Tax-Free Disability Income

Employer-provided benefits are a great way for employees to maximize their compensation.  Some basic benefits that employers provide are paid time off, 401(k) match, and health insurance.  Some benefits are paid by the employer or are eligible to employees at lower prices than if they went out into the public market to purchase.

Some employers are generous and offer to pay the premiums of some benefits, like disability policies. A typical disability policy will cover around 60% of your income if you were to become disabled and incapable of performing your job. This is very important coverage to have because statistics show you are more likely to become disabled than die during your working years. The replacement income a disability policy provides can be vital for individuals and families to continue paying bills.

However, if your employer pays for your policy, then the income you receive from your disability policy is taxed as ordinary income.  For instance, if you make $100,000/year and have a similar disability policy as the one above you would receive $60,000, right? Well, if your employer paid for the policy, your after-tax income is closer to $48,000. That difference of $12,000 can be a big deal if you are unable to work.

What we have seen with our clients is that if your benefits are set up so that your employer is paying for your disability benefit there is usually an easy solution to get that income on an after-tax basis. Simply calling your HR or payroll department and have the cost of premiums come out of your own paycheck. This way your disability benefits come to you tax free!