Tuesday, May 21, 2024

What Percentage Of Individually Owned Disability Income Benefits Is Taxable

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Is Disability benefits taxable?

At Chisholm Chisholm & Kilpatrick LTD, our team of experienced attorneys and professionals can help you secure your long-term disability claim. Although CCK does not offer tax advice, we can help make sure your long-term disability claim is being handled fairly and manage your claim for you so that you do not have to deal with the insurance company. Contact us now at 800-544-9144 for a FREE consultation to see if we can help you with your long-term disability claim.

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Cellular Phone And Internet Services

If you provide your employee with a cell phone that you own, to help carry out their employment duties, the fair market value of the cell phone or device is not a taxable benefit.

However, if you reimburse your employee for the cost of their own cell phone , the FMV of the cell phone or device is considered a taxable benefit to the employee. This is the case even if the employee used, lost, or damaged the cell phone or device while carrying out their employment duties.

If you pay for, or reimburse the cost of an employees cell phone service plan, or Internet service at home to help carry out their employment duties, the portion used for employment purposes is not a taxable benefit.

If part of the use of the cell phone or Internet service is personal, you have to include the value of the personal use in your employee’s income as a taxable benefit. The value of the benefit is based on the FMV of the service, minus any amounts your employee reimburses you. You can only use your cost to calculate the value of the benefit if it reflects the FMV.

For cellular phone service only, we do not consider your employee’s personal use of the cellular phone service to be a taxable benefit if all of the following apply:

  • the plan’s cost is reasonable
  • the plan is a basic plan with a fixed cost
  • your employee’s personal use of the service does not result in charges that are more than the basic plan cost


Group Benefits Taxation: What Are Non

Everyones favourite time of year is just around the corner: tax time.

Benefits and taxation are complicated and were covering both! so bear with us as we explain the connections.

This article focuses on the tax implications and considerations for employees. In a future edition, well turn our attention to the employer considerations. But first, a quick disclaimer: we recommend discussing these concepts with your tax authority.

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Life Insurance And Taxes

The proceeds your beneficiaries collect known as a death benefit are generally income tax-free.

  • Individuals cannot deduct life insurance premiums on their tax returns.
  • The same is generally true for businesses. Businesses cannot deduct life insurance premiums except in certain limited situations.

When you use a cash-value life insurance policy for income, the tax impact depends on your approach.

  • Withdrawal. Unless you have a modified endowment contract , withdrawals up to your policys investment in the contract are generally tax-free. Your investment is generally the total amount of money you have paid in premiums. Withdrawals beyond your investment are generally taxable.
  • Loan. Amounts you borrow from a non-MEC policy are generally tax-free, though tax consequences can occur upon any surrender or lapse of the policy.
  • Surrender or sell. When you surrender a policy for cash, any gains you have accrued are taxed as income. In addition, a loan balance may be taxable. If you choose to sell your life insurance policy to someone else, you will not only lose the rights to the death benefit, but you may owe taxes as well.
  • MEC policies. MEC policies are subject to less favorable tax rules for withdrawals and loans, as well as a potential 10% tax penalty for taxable amounts received prior to age 59 ½.

Guaranteed Standard Issue Disability Income Insurance

Social Security Disability Benefits Guide

Guaranteed standard issue disability income insurance is supplemental individual disability income insurance for employees. This coverage may help protect a higher amount of income than a group long-term disability insurance policy alone. Supplemental coverage can help bridge the gap between current earnings and benefits available through a group long-term disability insurance policy. Note that the two policies do not coordinate benefits claim decisions are rendered independent of each other.Guaranteed standard issue disability income insurance is supplemental individual disability income insurance for employees. This coverage may help protect a higher amount of income than a group long-term disability insurance policy alone. Supplemental coverage can help bridge the gap between current earnings and benefits available through a group long-term disability insurance policy. Note that the two policies do not coordinate benefits claim decisions are rendered independent of each other.

Advantages to employees:

  • Designed to replace a higher percentage of income when eligible for benefits under both policies
  • Simplified underwriting
  • Offers a permanent premium discount and is fully portable
  • Covers a portion of bonus and incentive compensation

Advantages to employers:

  • Enriches employee offerings at no cost to employers
  • Allows for easy implementation

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Is It Wiser To Buy Disability Coverage With Pre

There are many considerations to be made when deciding to pay your premiums with pre-tax or post-tax dollars. For example, what is the nature of your workplace? If you work in a hazardous environment where debilitating injuries are likely to happen, paying with post-tax dollars would be the wiser choice.

Accidents are always unpredictable and can be life-altering. If they do occur, you would be fortunate to receive your benefits tax-free for the duration of your short-term or long-term disability. To be prepared for the worst, it often can be beneficial to pay a little more now to receive a more substantial benefit if you experience an accident leaving you unable to work. Tax-free benefit payments could be closer to your regular take-home pay, helping you maintain financial stability while adjusting to living with your disability or illness.

If you choose to pay for your premium with pre-tax dollars and you become disabled, 100% of your disability benefits will be subject to federal income tax.

Group Disability Insurance Policies

If you are one of the millions of Americans with an employer-provided long-term disability insurance policy, then the taxability of the benefits would be based on who pays the premiums.

If the employee pays the premiums using after-tax income, benefits are tax-free. However, if the employer pays the premiums, benefits are taxable. If you and your employer split the premium costs, you will also split the tax liability.

This means that only the benefits that can be attributed to the employer-paid portion of the premium are taxable, while benefits attributed to your premiumpaid with after-tax dollarsare tax-free.

However, taxability differs if youthe employeeuse pre-tax dollars to pay your portion of the premiums. For example, if you use money earmarked in a medical reimbursement or cafeteria plan to fund the premium, your disability benefits are taxable.

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How To Calculate The Amount Of The Gst/hst You Are Considered To Have Collected

The amount of the GST/HST you are considered to have collected on a taxable benefit is based on a percentage of the value of the benefit for GST/HST purposes. The percentage rate you use depends on:

  • the province or territory in which the employee ordinarily reported to work
  • if you are a large business on December 31, 2020, for the purpose of the recapture of input tax credits for the provincial part of the HST
  • if the benefit is an automobile operating expense benefit
  • some other type of benefit

Value of the benefit

The value of the benefit for GST/HST purposes is the total of the following two amounts:

  • the amount reported on the T4 or T4A slip for the benefit
  • if the taxable benefit is for a standby charge or the operating expense of an automobile, the amount, if any, that the employee or the employee’s relative reimbursed you for that benefit

When an employee or an employee’s relative has reimbursed an amount equal to the entire taxable benefit for a standby charge or the operating expense of an automobile and, as a result, no benefit is reported on the T4 slip, the value of the benefit for GST/HST purposes is equal to the amount of the reimbursement.

Automobile operating expense benefits

  • 11% for Prince Edward Island, or 9.4% if you are a large business on December 31, 2020, for the purposes of the recapture of input tax credits for the provincial part of the HST
  • 11% for Nova Scotia, New Brunswick, and Newfoundland and Labrador
  • 9% for Ontario

Taxation Of Disability Insurance

Inadequacies of Group Long-Term Disability Income Insurance

What is Disability insurance?

A disability insurance policy generally provides a benefit on a periodic basis to an individual if they become disabled and their ability to earn income is compromised. The common element of the various definitions of disability is an incapacity or inability, as a result of an impairment, to pursue an occupation or to perform certain duties.

Disability insurance features and benefits are generally based on a number of factors. An important factor is the occupation class, which would determine the available plans, benefit periods, maximum benefit amounts and the premiums that will be paid. Similar to life insurance, the medical history of the client is important which may influence the premium rating, elimination period and benefit period. As well, the individuals financial information is reviewed to support the amount of insurance.

A return of premium feature may be offered as a rider under a disability insurance policy as a separate coverage for which a specified premium is charged. The feature provides premium refunds if there are few or no claims. Any claims may be subtracted from the total premium refund. Maximum refund amounts vary by insurer and contract. For example, a policyholder may choose a plan that returns 50% or 62.5% of all premiums paid less 100% of any disability benefits received.

How are Disability Insurance Policies Taxed?

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Determine How Much Income You’ll Need If You Become Disabled

It’s hard to know exactly how much income you’ll need after you suffer a disability, but you’ll probably need more than you think. Most of your fixed expenses won’t change, and you may save money on work-related expenses such as clothing, automobile costs, and lunches out. However, you’ll also spend more on other items, including the following:

Medical expenses: You can expect your medical expenses to rise when you suffer a disability. Assuming that you have health insurance, you’ll probably have to satisfy a deductible as well as an out-of-pocket maximum, which may increase your expenses immediately after your disability occurs. In addition, if you suffer a long-term disability and are forced to quit your job, your group medical insurance coverage may be terminated. If you work for a large enough employer, you may be able to continue coverage on your employer’s plan through the government regulation known as COBRA, but you’ll have to pay the premium yourself, and the coverage cannot last beyond 18 months in most cases. This can add hundreds of dollars to your budget. You may also need to buy medical equipment or supplies, or even renovate your house to accommodate your disability.

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

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One Type Of Disability Insurance Premium That Is Tax

The closest you can come to deducting your disability insurance premiums is if you own a business.

For those who also have to be concerned with keeping their businesses running in the event of short-term or long-term disability, there is an option called business overhead expense insurance .

Whereas regular disability insurance covers individual income, a business overhead expense policy will help cover monthly business expenses such as employee salaries, rent, utilities, maintenance, taxes, etc.

Premiums for this type of insurance are considered a business expense and are therefore tax-deductible. Overhead expense policies are specifically listed in IRS Publication 535, Business Expenses. Under the heading of deductible premiums, the document states:

âOverhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.â

Keep in mind, however, that deductibility does not apply to a business owner who gets disability insurance to cover lost personal income. It only applies to insurance that covers business expenses.

Your Family Members Don’t Need Work Credits

Are Disability Benefits Excluded from Gross Income ...

If you qualify for disability benefits, certain family members can also collect monthly disability benefits based on your work record. Eligible family members may include:

  • Your spouse age 62 or older, if married at least one year
  • Your former spouse age 62 or older
  • Your spouse or former spouse of any age, if caring for your child who is under age 16 or disabled
  • Your children under age 18, if unmarried
  • Your children under age 19, if full-time students or disabled
  • Your children older than 18, if severely disabled

Each eligible family member may receive a monthly check equal to as much as 50 percent of your basic benefit. This is in addition to your benefit–your check doesn’t get reduced.

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Spousal Tax Relief Eligibility Explorer

Many married taxpayers file a joint tax return because of certain benefits this filing status allows. If you did so, you may be held responsible for monies due, even if your spouse earned all of the income And this is true even if a divorce decree states that your spouse will be responsible for any amounts due on previously filed joint returns.

To qualify for Spousal Relief, you must meet certain conditions.

If You Need More Disability Income Insurance How Much Should You Buy

Once you’ve decided that you need to buy more disability income insurance, you should aim to cover a significant portion of the income that you will lose if you become disabled. However, you may not be able to buy as much coverage as you want. The insurance company determines the maximum amount of disability income insurance you can purchase, based on your income, health, age, and the amount of other disability benefits you’re entitled to. Most companies will sell you insurance that replaces 50 to 70 percent of your monthly pretax earnings .

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Registered Retirement Savings Plans

Contributions you make to your employee’s RRSP and RRSP administration fees that you pay for your employee are considered to be a taxable benefit for the employee. However, this does not include an amount you withheld from the employee’s remuneration and contributed for the employee.

If the GST/HST applies to the administration fees, include it in the value of the benefit.

Payroll deductions

Contributions you make to your employee’s RRSPs are generally paid in cash and are pensionable and insurable. Deduct CPP contributions and EI premiums.

However, your contributions are considered non-cash benefits and are not insurable if your employees cannot withdraw the amounts from a group RRSP before the employees retire or cease to be employed.

Although the benefit is taxable and has to be reported on the T4 slip, you do not have to deduct income tax at source on the contributions you make to your employee’s RRSPs if you have reasonable grounds to believe that the employee can deduct the contribution for the year. For details, see Chapter 5 of Guide T4001, Employers’ Guide Payroll Deductions and Remittances.

Administration fees that you pay directly for an employee are considered taxable and pensionable. Deduct CPP contributions and income tax. These are considered a non-cash benefit, so they are not insurable. Do not deduct EI premiums.

You’ll Also Need Sufficient Work Credits To Qualify

Do You Have to Pay Taxes on Your Social Security Disability Benefits?

When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you earn. The number of credits that you need depends on how old you are when you become disabled. For instance, if you’re age 31 to 42, you’ll need to have earned 20 credits within the last 10 years, ending with the year in which you became disabled. If you’re younger than 31, you’ll need fewer credits if you’re older than 42, you’ll need more.

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What Other Types Of Riders Offer Added Protection

Many other riders are typically available, and some of the most popular choices include:

  • Basic or enhanced partial disability benefit rider: These options protect you by paying a partial benefit if you suffer an injury or illness that limits your ability to work but doesnt cause total disability.
  • Student loan protection rider: This optional benefit provides extra money to make student loan payments during a specified period. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education.

Future purchase option: This lets you increase coverage in the future as your income rises, without having to undergo a medical exam or provide proof of insurability.***

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