Business Structures And Disability Insurance Taxation
A businesss legal structure influences the taxation of any disability benefits received by the business owner or other employees. Most businesses that provide long-term disability insurance coverage to employees as a group benefit will treat the purchase of premiums for the LTD coverage as a tax-deductible expense. Below are general guidelines about how disability insurance taxes work under common business structures.
What Are The Caps For Private Disability Insurance
Like most insurance policies, private disability coverage is capped. Coverage options go up to $1,500 per month. Premiums start at $120 per year or $10 per month. Every part- and full-time Canadian worker deserves to be covered by a sufficient disability policy.
Disability insurance, both private and through the employer, have a deadline. As mentioned above, the short-term policy offers short-term coverage while the long-term policy offers longer coverage. If you feel a long-term policy is more suitable for your industry and your employer does not offer disability insurance, you still qualify for coverage.
Private disability insurance premiums can be paid monthly, bi-annually, or annually.
Can I Claim Disability Insurance Premiums On My Taxes
You made the decision to buy disability insurance or already have coverage. Now, you want to know whether premiums are deductible, like other business expenses. It’s a simple “no” answer. Individuals can’t claim disability insurance premiums on their taxes. According to Dave Dineen, who writes about retirement issues for Sun Life, “deductibility of insurance premiums is a complicated maze of specific rules for specific scenarios.” If your small business offers a group insurance plan and pays the premiums for its employees, claiming those premiums for tax purposes by an employee is not allowed. In fact, premiums that employers pay for employees get treated as taxable income. Grant Thornton is one of the largest accounting firms in the country. Their tax-planning guide states that self-employed workers may be able to deduct health plan premiums from income for themselves and their dependents. Furthermore, the guide also explains that disability insurance premiums do not qualify as a personal expense deductible that is from income. The tax-deductibility of premiums is a complex issue. It’s best to consult with a tax professional to discuss your specific situation. That way, you can review any insurance proposals you have and their tax consequences at the same time.
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Is Disability Insurance Tax
Many of my clients ask me the popular question: is disability insurance tax deductible? It may be a little complicated, but the real answer is maybe. It all depends on who provided the coverage and what type of business you own.
Even if they are tax-deductible, it may not be in your best interest to take that deduction. Why? Because if you did, the benefits would be taxable. If you pay with after-tax dollars , the benefits would be received tax-free.
Unlike other health insurance , you typically cannot deduct the premiums on your tax return. But because the premiums are paid with after-tax dollars, the benefits would be received tax-free during a claim.
Let’s look at business owners to see if they can take a deduction for the premiums:
Let’s look at an example. XYZ Corporation provides employee Y disability insurance benefits with an annual premium of $1,000.
Let’s look at an example of a 35-year-old attorney with a $5,000 monthly benefit, cost-of-living rider, and an annual premium of $1,500.
So, is disability insurance tax deductible? Again, maybe, maybe not.
2020-100546 Exp: 5/1/22
Contact Chisholm Chisholm & Kilpatrick Ltd
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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Disability Coverage Make It Your Mission
Every Canadian worker needs to have a mission when it comes to their insurance coverage. This is not just including disability insurance but other critical insurance policies, such as Critical Illness .
When employers offer their employees the opportunity to sign up for disability insurance, they will offer two types, which were mentioned briefly above. Short- and long-term disability generally go hand-in-hand. What this means is they are purchased as two separate policies but are combined together in the event of a workplace injury.
When an employee who is covered under both short- and long-term disability policies is injured on the job, the first he/she will do is file a claim with their employers insurer. In turn, the insurer initiates an investigation into the claim to determine if it is legit. Once legitimacy is determined, the insurer will begin processing the claim.
It can take anywhere between one to weeks after your initial disability insurance claim was filed to start receiving payments.
What Are Itemized Deductions
If you have certain types of expenses you can choose to itemize deductions instead of taking the standard deduction. Meanwhile, everyone who files a tax return can claim the standard deduction, which is a set amount based on your filing status.
The standard deduction is $12,400 for single tax filers in 2020 and married couples can take a standard deduction of $24,800. In 2021, the standard deduction will go up to $12,550 for single filers and $25,100 for joint filers.
Itemizing is only worth it if your itemized deductions are worth more than the standard deduction, which isnât the case for most people. After the Tax Cuts and Jobs Act of 2017 greatly increased the standard deduction, only about 11% of taxpayers itemize deductions.
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What To Consider When Buying Disability Insurance
If you’re considering disability insurance, make sure you:
- check with your employer to see if you already have group disability coverage with your employer’s plan
- shop around, especially if you’re considering private disability insurance
Consider group insurance offered through a union, guild, or professional or alumni association. Premiums for this type of coverage usually increase as you get older. You’ll need to renew your insurance every few years.
Disability Insurance Taxation On A Lump Sum Buyout
Your insurer may come to you with a lump-sum buyout offer. This is a one-time fixed payment where the insurance carriers want to pay you a percentage of the remaining value of your claim. The lump-sum payment puts an end to the continuing monthly payments.
Again, disability insurance taxation comes down to whether premiums were paid with pre-tax or after-tax dollars. If your lump-sum buyout is taxable, be aware that the one-time payment the insurer offers may be substantially reduced by taxes.
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Taking Advantage Of Tax
Staying financially responsible is one of the pillars of a quality growth strategy, which is why small business owners and startup founders are constantly looking for new ways to save money. One of the best cost-saving tools that small businesses have at their disposal is the ability to claim a variety of tax deductions on business-related expenses.
And while tax season can certainly be an incredibly stressful time of the year for business owners, putting in the time and effort to take advantage of every tax deduction opportunity available is well worth it.
Business insurance premiums just so happen to be an excellent tax deduction opportunity that no business should miss out on. Since the Internal Revenue Service classifies insurance as a necessary cost of conducting a trade or business, many of the policies you have purchased are deductible expenses on your federal tax return and can provide you with significant savings.
Lets take a closer look at what types of business insurance premiums are and arent deductible and talk further about what your business needs to do in order to take advantage of this excellent cost-cutting opportunity.
Railroad Disability Benefits And Military Disability Benefits
Railroad disability benefits and military disability benefits are available to those who have worked/are working for a railroad or the military. Benefits do include some disability pay, among other retirement funds in each category.
Railroad disability benefits and taxes:
Railroad disability benefits: These may be taxable depending on a very lengthy mathematical equation. Its best to get the details from an independent insurance agent on this one, but just know they can be taxed.
Military disability benefits and taxes:
Military disability benefits: Military disability benefits are excluded from taxable income most of the time, as they should be.
If you qualify for these benefits, its important to speak to an independent insurance agent so everything you deserve is on the table. An independent insurance agent can both guide and consult you on all the finer points of railroad and military disability benefits while helping to fill in any gaps if the coverage isnt sufficient.
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Is Long Term Disability Insurance Tax Deductible
You cannot deduct long-term disability insurance premiums from your personal income taxes. Long-term disability insurance is often confused with medical insurance, which is tax-deductible. Long-term disability premiums are not considered a medical expense by the IRS. Disability insurance of any kind is generally not tax-deductible.
If you pay with post-tax dollars, the premiums have already been taxed upfront, these payments cannot be claimed again. Any premiums paid with pre-tax dollars must be filed as income.
Life & Health Insurance Offered By Td
TD Accident and Sickness Insurance can provide financial coverage to help you and your family in the event of a covered critical accident or illness resulting in disability, a serious injury, or death. Supplement any existing coverage you may already have through life insurance, employee benefits, or your provincial health care plan. Although these payments may not be tax deductible, benefits are received tax-free.
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Other Sources Of Disability Benefits
You may also be eligible for benefits from the Canada Pension Plan and the Quebec Pension Plan to add to your income when you’re unable to work.
The CPP disability benefit and QPP disability benefit are available to people who have contributed to those plans and aren’t able to work regularly at any job because of a disability.
Health Insurance Not A Tax
Ordinarily, when you form a corporation to own and operate your business, youâll work as its employee. If you form a regular âCâ corporation, your corporation can provide you with health insurance as an employee fringe benefit and deduct the cost as a business expense. And you donât have to pay any tax on the amount of the insurance premiums because they qualify as a tax-free employee fringe benefit.
However, when you elect S corporation tax status for your corporation, special tax rules come into play. Under these rules, anyone who works for an S corporation and owns 2% or more of its stock, must include in his or her wages the cost of certain employee fringe benefits provided by the corporation, including health insurance. This means income taxes must be paid on the amount of the premiums. Social Security and Medicare taxes have to be paid as well unless the procedure described below is followed.
Moreover, you canât get around this rule by employing your spouse and providing him or her with company health insurance that covers you and rest of your family. Your spouse and other family members are considered S corporation shareholders for these purposes, even if they donât actually have any stock in their names. They are treated as if they own all the stock that you own.
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What is taxed?
Either the premium or the benefit is taxed. If the employer pays the entire premium, then the employee pays all taxes on the benefit. If the employer pays any part of the premium and the employee pays the remaining balance with post-tax dollars, then the benefit received is taxed in the same proportion. If the employee pays the whole premium with post tax dollars, then the benefit received is not taxed.
Beware The 60% Ltd Plan Shortfall: Benefits Are Further Reduced By Ssdi And Taxes
The amount of group LTD coverage may vary from plan to plan, company to company. Most group LTD plans only insure up to 60% of your base salary, with no protection for bonus income.
Why is this important? The taxability and offsets that plague employer-paid LTD benefits cause the take-home benefit amount to be much less than expected. Wherever you fall in the income spectrum, you are likely unaware of just how under-insured you may be.
When disability strikes and benefits are paid, the replacement income you thought you would get stands to be reduced three more times:
We advise our clients how SSDI will impact their LTD benefits, and whether the insurance company will offset any payment of SSDI that they may be entitled to.
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Can You Deduct Disability Premiums From Your Taxes
A lot of people wonder whether they can deduct premiums they pay for short-term or long-term disability coverage from their taxes. The general answer is that since the IRS does not include disability coverage costs to be qualified medical expenses, you cannot take this deduction. However, it is still important to keep up with premiums, even if they are not tax-deductible. You never want to risk your policy lapsing just before you suffer a disabling injury or illness and need coverage.
Deducting Premiums Paid For A Private Health Insurance Plan
While the Medical Expense Tax Credit can significantly reduce your taxes, it is not always obvious which medical expenses are eligible. Payments of premiums for private health service plans may qualify if they meet certain criteria, while others are excluded. It is important to know if any of your payments are eligible towards this credit.
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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.
Are Disability Insurance Premiums Deductible In Canada
“Prepare for the worst and hope for the best” is a common expression. Disability should be on everyone’s list of things to prepare for. Disabilities caused by injury or illness are challenging life events that happen to anyone. Disability and other types of insurance should be part of your financial and business plan. Most of us depend on our income to support our living expenses and our families. Disability insurance provides financial security. Knowing that insurance will cover your expenses if something serious happens to you brings peace of mind. It’s hard to save up for emergencies and unexpected life events when you own a business. Undoubtedly, relying on savings can help, but it’s a temporary solution. That’s why insurance is so important because a disability can be long-term or even permanent.
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Fees Deductible Over Five Years
You can deduct certain fees you incur when you get a loan to buy or improve your business property. These fees include:
- application, appraisal, processing, and insurance fees
- loan guarantee fees
- loan brokerage and finders fees
- legal fees related to financing
You deduct these fees over a period of five years, regardless of the term of your loan. Deduct 20% in the current tax year and 20% in each of the next four years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months.
However, if you repay the loan before the end of the five-year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.