You Asked, We Answered . . .

Q:  I’m collecting disability because of a bad back. Do I have to pay taxes on that money? Friends have told me yes … and no.

A: There's a good reason some of your friends say “yes” and some say, “no.” According to financial planner Elizabeth Lewin, who writes the “Female Finance” column in MAKING BREAD magazine, "It depends on who pays the premium on the disability insurance:

“Group disability provided by an employer is generally taxable, if the premiums are deducted from your income on a pre-tax basis, as medical-insurance premiums are.

 “If the premiums are deducted by your employer on an after-tax basis—in other words, if you haven’t already received a tax benefit by having your taxable income reduced in the amount of the payments—some or all of your disability payments may be tax-free.

“If you have an individual policy, where you pay the premiums yourself, then any disability payments you claim are usually considered tax-free income.

              "When you receive Social Security disability benefits, the benefit is 50 percent taxable, if your income is between $25,000 and $34,000.  If your income is more than $34,000, then 85 percent of the benefit amount is taxable."

            As you can see, the answer is complicated and depends entirely on your particular situation. For further information before you fill out your tax forms, we suggest you visit www.irs.gov, or call the IRS for assistance at 800-829-1040.

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This answer was prepared by the staff of MAKING BREAD. Click here to try a trial subscription to MAKING BREAD magazine for only $5.95, and catch up with all of the terrific “Female Finance” advice offered in every issue, downloadable immediately from our Download Center.
 

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