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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Disability benefits are not taxable income
Tax Talk

Don't worry about disability taxes

Dear Tax Talk:
I am permanently disabled beginning this tax year (2007), and can't work. I will be receiving income from a private disability insurance policy, as well as Social Security disability benefits. Does the IRS or the state of Georgia require taxes to be paid on this income? It's not workers' compensation. If taxes are required, are tax credits or any special treatment given to this income? Thanks in advance.
-- Gaines

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Dear Gaines,
Amounts you receive under a private disability policy are not taxable to you. If your employer had paid the premiums, then the disability income would be taxable, except in the case of workers' compensation benefits.

If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income.

Similarly, if the plan pays for medical expenses, you cannot deduct those costs. For example, if the plan pays $100 per day for nursing care, you cannot deduct up to $100 of nursing care.

Social Security benefits are taxable income if your modified adjusted gross income exceeds a certain threshold. Social Security benefits include monthly retirement, survivor and disability benefits. They do not include supplemental security income, or SSI, payments, which are not taxable.

To find out whether any of your benefits may be taxable, compare the threshold for your filing status with the total of one-half of your benefits, plus all your other income, including tax-exempt interest.

You would not include your disability payments as income, as they are not taxable. Your threshold depends on your filing status.

Disability tax threshold:
$25,000 if you are single, head of household, or a qualifying widow(er).
$25,000 if you are married filing separately and lived apart from your spouse for all of 2007.
$32,000 if you are married filing jointly.
Zero if you are married filing separately and lived with your spouse at any time during 2007.

Generally, states follow federal rules in determining what is considered taxable income. If your only income comes from the private disability policy and Social Security benefits, you would owe no taxes.

Bankrate.com's corrections policy -- Posted: Sept. 11, 2007
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