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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Whether disability is taxed depends on type of deduction
Tax Talk

Tax on short-term disability

Dear Tax Talk:
I have short-term disability premiums deducted from my paycheck. Is the short-term disability income I received taxable in Georgia, or by the IRS?
-- C. Paul

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Dear C. Paul,
There are two types of payroll deductions: pretax and after tax. A pretax deduction means that federal and state income tax withholding was not applied to the item deducted and the item is not considered additional wages. This is most common with items under a cafeteria plan, such as the employee-paid portion of health insurance coverage.

It could also apply to disability insurance. For example if you were paid $1,000 a week and had to pay $20 each pay period for disability insurance, a pretax deduction would mean that your gross wages for federal and state income tax withholding was only $980 and at the end of the year your Form W-2 would show Box 1 wages of $50,960 instead of $52,000.

An after-tax deduction means the opposite: Federal and state income taxes were withheld on the item and the item is considered taxable wages. This is common when an employer does not maintain a cafeteria plan for certain fringe benefits or the item is not an excludable fringe benefit. Continuing the previous example, your Form W-2 would show Box 1 wages of $52,000 and the deduction would generally not appear on your Form W-2.

The taxation of disability income depends on whether the premiums were paid pretax or after-tax. Disability income would be taxable if the premiums were pretax deductions. Disability income would be tax-exempt if the premiums were paid after-tax. Most states follow federal rules, so that if it were exempt for federal income tax purposes it would be exempt for state income taxes.

Bankrate.com's corrections policy -- Posted: Dec. 14, 2007
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