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Disability insurance premiums can be relatively expensive: as much as 1% to 3% of your salary for long-term disability insurance, the most cost-effective disability insurance product. That may seem like a lot, and you may want to deduct some of those expenses from your taxable income and hope to get some of it back in the form of a tax refund. Unfortunately, that’s not possible. Disability insurance premiums are not tax-deductible.
The IRS allows taxpayers to deduct certain medical expenses by taking an itemized deduction on their tax return. (The amount you deduct can’t be less than 10% of your adjusted gross income.) Health insurance premiums are usually tax-deductible under this rubric, so it would seem to follow that disability insurance is also tax-deductible, in that disability insurance complements health insurance by paying out money for what amount to serious medical issues.
But the IRS, under a big, bold section in Publication 502 titled “Insurance Policies You Can’t Include,” specifically prohibits individuals from deducting premiums for “policies providing payment for loss of earnings,” “policies for loss of life, limb, or sight,” and “policies that pay you a guaranteed amount each week for a stated number of weeks if you are hospitalized for sickness or injury.” All of those exclusions are functions of disability insurance (the same section also prohibits including premiums for life insurance policies.)
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If you earn an income, you’ll be assessed a tax liability on it, which is a percentage of your earnings in each of seven progressively higher income ranges, called tax brackets. Each tax bracket represents taxable income, which is the amount of money you earned from your salary, wages, tips, or other sources. You only pay taxes on the amount of income that falls into each range, plus on any dollar that falls into the range immediately after it.
But taxpayers reduce the amount of income that can be taxed by claiming a deduction: either the standard deduction, a blanket dollar amount you claim regardless of your income, or an itemized deduction, where you add up your eligible expenses and subtract them from your income.
Itemizing deductions is a more elaborate and complicated process because it requires knowing what expenses are eligible and tracking them throughout the year, then filling out longer and more complex forms to document each expense when you file your tax return. The amount most people can itemize is usually much lower than simply taking the standard deduction – there’s a reason the respective tax form is called the 1040EZ.
For tax returns you file in 2018, representing income earned in 2017, the standard deduction for single people is $6,350 and $12,700 for married people filing jointly. That means if you earned $70,000 in 2017, and are filing as single, you only have to pay taxes on $63,650 of that income if you claim the standard deduction. Another deduction that most taxpayers are entitled to, called the personal exemption, reduces that amount by $4,050.
You won't pay tax on any disability insurance benefits you paid for with after-tax dollars.
The Tax Cuts and Jobs Act of 2017 raised the standard deduction to $12,000 for single filers and $24,000 for married people filing jointly, which will apply to income earned in 2018. That means many people who benefited from itemizing deductions in the past may find that it makes more sense to claim the standard deduction now. The TCJA also eliminated the personal exemption.
No, you can’t deduct your disability insurance premiums from your individual taxable income. While disability insurance may seem like protection against medical expenses, which could fall under eligible deductions, it actually falls under the category of income replacement.
If you itemize your deductions and claim a medical-expenses deduction, you’re limited to eligible expenses outlined in the IRS’ Publication 502, “Medical and Dental Expenses.” While you can include insurance premiums (unless employer-sponsored) that cover medical care, including hospitalization, surgery, prescriptions, and dental care, the IRS specifically prohibits including premiums that pay for the following:
- Life insurance policies,
- Policies providing payment for loss of earnings,
- Policies for loss of life, limb, sight, etc.,
- Policies that pay you a guaranteed amount each week for a stated number of weeks if you are hospitalized for sickness or injury,
- The part of your car insurance that provides medical insurance coverage for all persons injured in or by your car because the part of the premium providing insurance for you, your spouse, and your dependents isn't stated separately from the part of the premium providing insurance for medical care for others, or
- Health or long-term care insurance if you elected to pay these premiums with tax-free distributions from a retirement plan made directly to the insurance provider and these distributions would otherwise have been included in income.
If you pay for your premiums with after-tax income, you won’t be taxed again when you become disabled and claim disability insurance benefits. But if you or your employer pay your disability insurance premiums with pretax income and claim disability insurance benefits, you could potentially owe taxes because the benefits are categorized as income. The percentage of the premium paid with pretax income is the percentage of disability insurance benefits you’ll have to report as taxable income.
While your disability insurance premiums are not tax-deductible, other medical expenses may be. The full list is available in the IRS’ Publication 502 and includes several dozen eligible medical expenses. Among them are crutches, psychiatric care, abortions, eye exams, guard dogs, devices like lactation pumps, telephones and televisions for people who are hard of hearing or deaf, and hearing aids. Dental and vision expenses may also be tax-deductible.
Publication 502 also lists the medical expenses that are not tax-deductible, including diapers, teeth whitening, weight-loss programs if the weight loss is for cosmetic reasons, and dancing or swimming lessons that may improve general health.
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