Taxation of Disability Insurance

The IRS taxes each dollar ONCE — premium in or benefit out. Individual policies: after-tax premiums → tax-free benefits. Group: employer-paid (deductible to employer) → benefits taxable; employee-paid pre-tax → taxable; employee-paid after-tax → tax-free; shared → split proportionally. SSDI: up to 50% taxable once combined income tops $25K single / $32K joint — rising to up to 85% above $34K/$44K (thresholds frozen in statute, not indexed). Workers' comp: tax-free (except SSDI-offset amounts).

Follow the untaxed dollar: whoever escaped tax on the premium pays tax on the benefit.