Can You Claim A Tax Deduction For Insurance Premiums
As a general guideline, the ATO will allow a deduction for certain insurance premiums if it can be shown that the insurance cover relates to earning assessable income. In other words, life insurance, trauma insurance or critical care insurance are generally out. Income protection insurance is one example of the kind of cover that may provide an allowable tax deduction for premiums such claims have been allowed by the ATO in certain circumstances, even though having the insurance policy does not of itself earn income for the taxpayer.
The deciding factor, especially for the self-employed, seems to be the ability to earn assessable income. In such cases this can mean that taking out disability insurance against loss of income could generate a tax deduction for the premiums. For anyone running a small business, protecting the ability to earn an income can also result in insurance premiums that can possibly be deductible for cover for fire and theft, motor vehicles, public liability and loss of profit.
It is always advisable for taxpayers to get specific advice for their situation, but deductions have been allowed for the above mentioned insurance products, even though the cover may include some capital assets that is, the value of the item covered as well as the income-earning component of that asset.
Again, it is highly advisable for taxpayers to get specialised advice, as the combination of insurance and tax can lead to complicated situations.
Why Should I Put The Effort Into Calculating My Deductions And Income Properly
While preparing your taxes and going over your income and deductions with a fine-toothed comb can be frustrating and time-consuming, it is well worth the time you spend. You protect yourself from audit, and have the possibility of not owing any tax or even a refund.
Sometimes, the best advice our Social Security Disability attorneys can give our clients whose tax situation may be challenging is to hire a tax professional. While you may spend a small amount up front for their services, you have the best odds of minimizing your taxes. If you have yet to see your tax guy, make an effort to do soyour wallet will thank you!
Looking to learn more about SSDI income? Browse through our helpful online articles to brush up on your SSDI knowledge today!
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Can I Deduct Any Insurance Premiums
In general, you canât deduct insurance premiums. There are certain cases where you might be able to deduct some type of insurance premium, but they usually apply to self-employed people and businesses:
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Self-employed workers and business owners who pay homeowners or renters insurance for business property, including a home office, may be able to deduct insurance premiums as a business expense.
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An employer may be able to deduct premiums for a life insurance policy if the employer buys a policy for an employee, and the employer isnât the beneficiary of the plan.
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Self-employed workers and small business owners may be able to deduct health insurance premiums if they buy a policy for themselves, a spouse, and dependents.
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Certain long-term care insurance premiums are deductible as medical expenses if you itemize and claim the medical expense deduction on your income tax return.
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Some auto insurance premiums may be deductible if you use your personal vehicle for business, but it requires keeping a lot of records for the care of your vehicle. It may be easier for you to just consider mileage reimbursement.
As for disability insurance, the IRS specifically says you canât deduct insurance premiums or payments you make for a policy designed to replace income. In addition to DI premiums, the following are not deductible:
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When Is Social Security Income Taxable
To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.
Youll see that you fall into one of three categories. If your total income is:
- Below the base amount, your Social Security benefits are not taxable.
- Between the base and maximum amount, your Social Security income is taxable up to 50%.
- Above the maximum amount, your Social Security benefits are taxable up to 85%.
The Great State Of Florida
Florida is coined for its citrus, sunshine and scenic coasts– its the sunshine state of course. The good news for you is that Florida is one of eight states that does not have a state income tax which means that both Social Security Disability Insurance and Supplemental Security Income are not taxed at the state level. Note that SSI benefits are never taxable at any level in any case.
Federal Income Taxes
However, on a federal level, you may be subject to pay federal income taxes on your disability benefits. This typically only happens if you are receiving additional substantial income including wages, self-employment, interest, dividends or other taxable income.
Under the Internal Revenue Service , no one is required to pay taxes on more than 85% of their Social Security benefits in federal income tax. Like any tax filings, you may choose to file as an individual, jointly or married and file separate tax returns. Whichever way you choose to file your taxes, there are specifications for your income and the percentage, if any, of your benefits that may be taxed. The following is a simple formula for calculating your combined income:
Your Adjusted Gross Income + Nontaxable Interest +½ of your Social Security Benefits
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Taxation Of Social Security Disability Backpay
Large lump-sum payments of back payments of SSDI can bump your income up for the year in which you receive them, which can cause you to pay a bigger chunk of your backpay in taxes than you should have to. To avoid losing part of your backpay this way, you are allowed to apply the SSDI benefits owed from a prior year to prior tax returns, lowering your income for the year you receive the lump sum. For example, if you were entitled to disability benefits for 22 months before you received your back pay, you could amend your tax returns for two prior years to claim some of the income in those years instead of the current year. You should ask a lawyer or CPA for help on this. For more information, read our article on how Social Security disability backpay is taxed.
Evaluation Guides If You Are Self
If you are a self-employed person. If you are working or have worked as a self-employed person, we will use the provisions in paragraphs through of this section that are relevant to your work activity. We will use these provisions whenever they are appropriate, whether in connection with your application for disability benefits , after you have become entitled to a period of disability or to disability benefits, or both.
How we evaluate the work you do after you have become entitled to disability benefits. If you are entitled to social security disability benefits and you work as a self-employed person, the way we will evaluate your work activity will depend on whether the work activity occurs before or after you have received such benefits for at least 24 months and on the purpose of the evaluation. For purposes of paragraphs and of this section, social security disability benefits means disability insurance benefits for a disabled worker, childs insurance benefits based on disability, or widows or widowers insurance benefits based on disability. We will use the rules in paragraph of this section to determine if you have received such benefits for at least 24 months.
We will use the guides in paragraph of this section to evaluate any work activity you do before you have received social security disability benefits for at least 24 months to determine whether you have engaged in substantial gainful activity, regardless of the purpose of the evaluation.
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Since Disability Benefits Are Unearned Income Are They Taxed
Your other income besides disability payments determines if your disability benefits are taxed or not. Your benefits are considered together with income from taxable disability plans, investments, and pensions by the IRS. In 2016, a single person may make up to $25,000 a year without being taxed on disability benefits, and a couple may make up to $32,000 a year without any disability benefits being taxed.
How To Avoid A Getting A Large Tax Bill You Can’t Pay
Some people who receive long-term disability benefits and apply for Social Security save part of their LTD benefits in case they have to pay an eventual tax bill. If you’re receiving LTD benefits and expect to receive a large lump sum from Social Security, you may want to contact a tax professional immediately to discuss the tax implications of your backpay.
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Taxing Social Security Disability Income
SSI payments are not taxable.
SSDI benefits, like other Social Security income, must be reported on your tax return. Whether you pay tax on those benefits depends on your total income and benefits for the year.
You may have to pay federal income tax on your SSDI benefits if the total of half of all your SSA benefits, other than SSI, plus all your other income is greater than the base amount for your filing status. If youre married and file a joint return, you have to calculate your total based on all your income and your spouses income combined, even if your spouse didnt receive benefits.
The base amounts are
- $25,000 for single, head of household or qualifying widow
- $25,000 if you are married filing separately and lived apart from your spouse for the entire year
- $32,000 for married filing jointly
- $0 if you are married filing separately and lived with your spouse at any time during the tax year
Are Long Term Disability Benefits Taxable
In 2015, the CRA updated its disability benefit tax withholding requirements. The changes impacted the method of calculating taxable disability benefits for both STD and LTD plans.
Traditionally, STD and LTD benefits would be taxed when you file your annual income tax returns. This meant income tax was not deducted during issuance of STD or LTD payments. From January 2015, CRA requirements are now that STD and LTD payments have to be taxed at the time the payments are issued.
STD and LTD Wage Loss Replacement Plans , which insures employees against loss of employment income following disability, accidents, or sickness, are generally subject to tax when the employer is the one making contributions and are to be reported on line 104 of your T1.
On the other hand, STD and LTD plans that fall under income-replacement benefits, which are payments made to persons who are unable to work as a result of auto accidents, are normally not taxed. Income replacement benefits are offered as part of SABs , which are a requirement in Ontario with all auto insurance.
Employee-Paid Premiums
If the employee is making the full premium payments for his/her STD or LTD plan, they are not taxed. When you are paying your own LTD insurance premiums, you are using after-tax dollars. This means you do not get to reduce your income tax to cater for the premiums you have paid for disability insurance.
Employer-Paid Premiums
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Is Disability Insurance Taxable
Disability benefits may or may not be taxable. You will not pay income tax on benefits from a disability policy where you paid the premiums with after tax dollars. This includes:
- A policy you bought yourself with after-tax dollars
- A employer sponsored policy you contributed to with after-tax dollars. These rules apply to both short-term and long-term disability policies. Income from social security disability isnt taxable if your provisional income isnt more than the base amount. Provisional income is your modified adjusted gross income plus half of the social security benefits you received. The base amount is:
- $25,000 if youre filing single, head of household, or
- $32,000 if youre
- $0 if youre married filing separately and lived together with your spouse at any point in the year
- Your modified AGI includes all other income without subtracting exclusions for:
How To Report Your Social Security Disability Income
Every January, youll get a Social Security benefits statement to use when you file your taxes. Follow these steps to include your benefits on your 1040 or 1040A forms. You cant use a 1040EZ if you receive SSDI benefits.
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Which States Tax Ssdi Benefits
Your SSDI benefits are subject to state income taxes in 13 states, but to varying degrees. If this is your first year filing with disability income, contact a local tax professional to walk you through the specifics of your state.
These states fully tax your SSDI benefits as income, with few if any exemptions for low income and senior status:
- Montana
Irs Rules: What Is Gross Income
For IRS purposes, the important number you report is called your AGI, or adjusted gross income. This is the result when you combine all your taxable income, then subtract all deductions you are eligible for. Your total income consists of:
- Wages
- Unemployment compensation
- Social security benefits
Once you have combined all applicable income sources, you have your total income. Then, you will subtract tax deductions to determine your AGI. Common deductions are:
- Educator expenses
- Student loan interest and tuition
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What Disability Benefits Qualify As Earned Income
If you are trying to apply for the Earned Income Tax Credit , you may be wondering if your disability income qualifies. If you earn disability retirement benefits, you can count it as earned income until you reach the age when you could receive a pension or annuity if you were not disabled.
SSDI and SSI are not considered earned income by the IRS. Military disability does not qualify as earned income, either.
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Do You Need To Pay Taxes On Your Ssdi Benefits
Whether or not you will need to pay taxes on your Social Security Disability benefits will depend on the amount of income you received last year. If your income minus your deductions is greater than the base income , any amount of income you made over the base income for your status is taxable.
On top of figuring out whether a portion of your income will be taxable, you will also need to figure out at what percentage that portion will be taxed. Similar to a standard tax bracket system, the higher you are above the base income, the more your benefits will be taxed. This can greatly assist those individuals and families who are just above the base income for taxation, but not drawing enough money to be taxed at a higher rate.
While the tax legalese can be confusing, you should have received two forms from the Social Security Administration that should make the process easier: Form SSA-1099 and Notice 703, which is a worksheet that helps you determine your income.
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Spreading Out Social Security Backpay To Lower Your Taxes
One bright spot is that the IRS allows disability recipients to apportion disability backpay to previous years’ tax returns, which often lowers or eliminates the taxable portion of the lump sum. Moreover, disability recipients need not file amended returns for previous years the situation can be addressed on one’s current tax return. For more on this method, consult IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits. In practice, most individuals and couples whose only income comes from disability benefits will face little to no taxes if their lump sum is apportioned to previous years.
Filing As An Individual
If you are filing your federal income tax as an individual with a combined income up to $25,000 and $34,000, then you may be subject to pay income tax on up to 50% of your benefits for those whose combined income is $34,000 and are filing as an individual, then your benefits may be taxed up to 85%.
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Whats The Difference Between Private Disability Insurance And Ssdi
Private disability often has a wider definition of what it means to be disabled and pays a benefit based on a percentage of your current paycheck. You can draw both your private disability and SSDI, but often your insurance company reduces the amount it pays you by the amount of your SSDI benefit. Some long-term disability insurers may require you to apply for SSDI after a certain amount of time.
Whether your private disability income is taxable depends on whether you pay the premiums with pre-tax or post-tax dollars. That income does add to your total income to determine whether your SSDI is taxable.