Insurance / tax question

[ENugent]

I ran across this suggestion on multiplesclerosissucks.com, so it’s not exactly a reputable tax advice site, but it appears to check out to the best of my ability to tell in looking at IRS documents.

It appears that the payout from long-term disability insurance is taxed if the insurance was provided as a benefit by your employer, and is untaxed if you paid for it yourself. The suggestion was to get a statement from your employer of how much they are paying for your LTD insurance, and then declare that amount as additional income on your taxes (the equivalent of your employer paying you the additional amount in cash, which you turn around and pay for LTD). If you do this, is any payout on the LTD untaxed?

(I realize that you can’t give me legal advice here, and I intend to consult my accountant and possibly a tax attorney if he doesn’t know the answer. But I’m curious if any Dopers have heard of this strategy and if you think it would work.)

[Shagnasty]

These kinds of things seem to be popping up tonight. I work for an HR outsourcing company and control these things in the most direct sense for hundreds of thousands of people. The idea makes no sense. Your benefits aren’t income and your employer isn’t going to give you a statement saying what it costs in total. If they did, you would find that LTD insurance is amazingly cheap for most people (a few dollars a month) so I don’t know what you would do with it even if you got such a thing. Then you turn around and do??? The employer manages the insurance and you already have it. I don’t know how to proceed from here. It is nonsensical.

[Gfactor]

There’s a rule that covers a similar situation:

Taxes on Disability Insurance
Will Your Disability Benefits Be Taxable? Here are the rules under current law:

* Your short-term disability benefits are taxable or tax-free depending upon how the plan premiums are paid. States with statutory short-term disability plans have special rules. 
* The portion of LTD benefits you receive that is paid by an employer is taxable to you. Federal, state and local taxes are withheld; Social Security and unemployment taxes are excluded. 
* The portion of LTD benefits you receive that is paid by you is tax-free, except if you pay with pretax dollars. 
* If you are an employee, self-employed, a partner in a partnership, or owner of a corporation and own an individual disability income policy, refer to the chart Individual Disability Policies: Are Your Long-Term Disability Benefits Taxable? To determine whether your benefits are taxable.

http://moneyfitness.com/mc5/topic.php?b=24548730&c=194&h=506,3,2,373,388

But:

Can disability premiums be deducted from my paycheck and paid with pre-tax dollars?

If you purchase disability insurance through an employer’s group plan or individually, you may be able to have the premiums deducted from your regular paycheck using pre-tax dollars if your employer offers a Section 125 cafeteria plan. If this option is available, take advantage of it. By using pre-tax dollars, you will reduce the amount of income that your employer reports to the Internal Revenue Service. In turn, you won’t owe as much in taxes. However, should you become disabled the benefit will be taxable.

Disability & SSDI Insurance Questions

There’s an excellend discussion of the issue here: http://www.hcvadvocate.org/hepatitis/hepC/Taxing%20disability%20benefits.htm

and here:

Relevant regulations provide that, if an employer pays the full cost of disability coverage (or the employee pays the cost with pre-tax dollars), the benefits payable in the event the employee becomes disabled will be taxable income to the employee. Conversely, if the employee were to pay the full cost of disability coverage with after-tax dollars, benefits payable on disability would be excluded from taxable income.

If the coverage is purchased with both employer (or employee pre-tax) contributions and employee after-tax contributions, there are rules for determining how much is attributable to each type of contribution, and the benefits are taxed proportionately.

http://www.ballardspahr.com/press/article.asp?ID=1078

[groman]

Wouldn’t you pay more taxes on it now than you would later?

[Tim_T-Bonham.net]

@Shagnasty

TYour benefits aren’t income

Unless, of course, you are a member of a gay or lesbian couple whose employer lets you cover your partner under health care, life insurance, and similar spousal benefits.

In the US, the IRS requires those benefits to be reported as income, and the couple has to pay additional taxes on them.

I can’t comment more on that and still stay in GQ territory.

[ENugent]

@Shagnasty

The idea makes no sense. Your benefits aren’t income and your employer isn’t going to give you a statement saying what it costs in total. If they did, you would find that LTD insurance is amazingly cheap for most people (a few dollars a month) so I don’t know what you would do with it even if you got such a thing. Then you turn around and do??? The employer manages the insurance and you already have it. I don’t know how to proceed from here. It is nonsensical.

Obviously I didn’t explain this well enough. I do, in fact, already have a statement from my employer on how much they pay for my LTD insurance (and it’s more than “a few” dollars a month, although it’s less than $100). Let’s assume for the moment that it’s $50, because that’s a nice round number, and that I make $50,000/year (both of these numbers are for purposes of illustration).

At the end of the year, I get a W-2 from my employer that says that they paid me $50,000. I also have a statement that they paid $600 on my behalf for LTD ($50/month). If I declare income of $50,600 and pay taxes on that, is it the functional equivalent of having paid for my own LTD, such that any benefit is not taxable (should I ever receive it)? Why or why not?

GFactor, the link from Ballard Spahr is very relevant, and I will have to figure out how it relates to my own situation. Thank you!