According to the tax code, any disability insurance benefit you receive is tax-free, as long as you pay the premiums yourself, with after-tax dollars. If your employer pays the premiums, the benefits will be taxable. If your employer pays part of the disability insurance premium and you pay the rest, then your tax liability will be split.
If you receive disability insurance benefits, the insurance company will report taxable and non-taxable payments, to you and to the IRS, on a W-2 form. The taxable amount should be included as income on your tax return but the non-taxable part doesn’t need to be reported.
To make sure that such reports are accurate, it’s vital for you to keep records so you’ll know what portion of the disability insurance premiums you actually paid. If you have such records, you can adjust the amount you report as taxable income on your tax return. To avoid a problem, attach an explanation of any adjustments.
