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Are Disability Insurance premiums tax-deductible & are there implications later

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  • Are Disability Insurance premiums tax-deductible & are there implications later

    I am a W2 employee with Sole-proprietor 1099 income from moonlighting.  Let's say I buy some additional Disability insurance to supplement the so-so policy provided by my W2 employer.  Can I deduct the premiums for this from my 1099 income?  I have been told that if I do, and later make a claim on the Disability policy, the income from that would become taxable.  i.e. Pre-tax premium = taxable income later, whereas Post-tax premium = non-taxable later.  True?

  • #2
    Life life insurance, disability premiums you pay are, for the most part, nondeductible. This is a good thing because if you have to claim benefits, they are not taxable. The exception is business overhead reimbursements for loss of income due to your disability. Those premiumss are deductible and the benefits are taxable.

    IRS Pub 535, ch. 6
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      You can deduct the premiums if your practice is incorporated and the benefits would then be taxable as income. Keep in mind you can switch between paying on a pre-tax and post-tax basis. Many of our clients pay pre-tax while they feel healthy and then post-tax if they develop a disabling condition.

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      • #4
        Premiums paid for a personal disability insurance policy are NOT income tax deductible as a Sole Proprietor.

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        • #5
          For those who are forced to purchase group disability practice in their groups, must it be either post-tax premiums or pre-tax premiums for everyone.  For example, if some of the younger docs would prefer to pay premiums with pre-tax dollars, understanding they'd be taxed if they ever claimed benefits, could this be arranged?

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          • #6




            For those who are forced to purchase group disability practice in their groups, must it be either post-tax premiums or pre-tax premiums for everyone.  For example, if some of the younger docs would prefer to pay premiums with pre-tax dollars, understanding they’d be taxed if they ever claimed benefits, could this be arranged?
            Click to expand...


            I've never heard of getting to choose the option. It would depend upon your plan document and, for simplicity in administration (i.e. No variations in W2 reporting), assume everyone would be treated the same. I've also never heard of being "forced" to purchase group disability ins. Are you sure this is not a free benefit provided by the employer?

            If you are one of the group owners, however, I suppose it wouldn't hurt to get an estimate on the cost of a customized option in the plan.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7




              Life life insurance, disability premiums you pay are, for the most part, nondeductible. This is a good thing because if you have to claim benefits, they are not taxable. The exception is business overhead reimbursements for loss of income due to your disability. Those premiumss are deductible and the benefits are taxable.

              IRS Pub 535, ch. 6
              Click to expand...


              While it doesn't really matter, because the way it is is the way it is, I disagree that it's a "good thing." I'd love to deduct my disability insurance payments if I could. Why? Two reasons- # 1 I'm more likely to not use the insurance than to use it. That means I get a valuable deduction at a very high tax bracket. # 2 If I actually have to use the insurance, I'll likely be in a MUCH lower tax bracket. Kind of like a tax deferred account- get the deduction while in a high bracket, and pay the taxes while in a low bracket. In fact, if I could deduct my premiums, I could just use the money saved to buy MORE of a benefit. After-tax, I'd be better off with the premiums being deductible.
              Helping those who wear the white coat get a fair shake on Wall Street since 2011

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              • #8
                Group LTD insurers often require 100% of the physicians as part of the insuring agreement in terms of offering the coverage. If the plan is contributory, some carriers offer the individual physician a choice of paying with pre-tax or post-tax dollars (usually large employers that are C Corporations).

                If the premiums are paid by the employer, some also offer a "tax choice" and having the premiums included in their taxable income (making the benefits tax-free upon receipt) or not (making the benefits taxable upon receipt).

                If there is a choice and one, generally, if one wants to purchase more individual coverage, they would not include the group LTD premiums in their taxable income making the benefits intentionally taxable.

                With group LTD, one also must be careful as there is a 3-Year look back in determining how benefits would be taxed.

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                • #9
                  Oversimplifying the ability to switch back and forth between tax-deductible and non-deductible individual disability insurance premium could result in inadvertently running afoul of IRS and ERISA rules, both of which will penalize the transgressors with daily penalties and fines.

                  Technically, it’s the incorporated employer (a separate tax entity from the business owner) that is paying and deducting the premium, not the individual business owner.  The employer entity can decide to implement an ERISA compliant insured “salary continuation” or “sick pay plan” which requires that the employer abides by anti-discrimination rules by creating a written plan, that is communicated to all employees (so they know about it), that creates an eligible class of employees, who will enjoy the discriminatory employer paid benefits. Failure to follow the anti-discrimination rules can result in daily penalties.

                  The employer is entitled to use any one or combination of: Title (occupation), Tenure (years of service) and Income, to define the eligible class of employees; note that ownership is not a legal discriminator.

                  For example, the employer could create a written sick pay plan for all employee-physicians (Title), with over one year of service (Tenure), earning more than $200k (Income). It would be discriminatory but legal and compliant, but all employee-physicians that meet those criteria would be eligible for employer paid benefits as defined by the written agreement.

                  So while an incorporated sole practitioner may be able to switch back and forth on tax-deductibility, on a whim, a paper trail would still be necessary to prove that the discriminatory benefit was compliant. Adding just one more eligible employee to the class would preclude the flexibility of changing whether the premium is deductible or not. Because everyone in the eligible class receives the same treatment (anti-discrimination).

                  The intention behind the rules is to benefit a class of employees and discourage self-dealing by business owners.

                  In short, legally deducting individual disability insurance premium creates a qualified transaction (subject to government rules and anti-discrimination), which results in taxable benefits and, not inconsequentially, the policyholder forfeiting his/her right to sue the insurer/employer, done purposefully to indemnify and encourage employers to create employee benefit plans to benefit more employees.

                  In conclusion, deductibility involves a lot of ongoing compliance, paperwork and trade-offs for a comparatively small deduction. Seek appropriate guidance before opening Pandora’s box.

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