What are the tax consequences for a lump sum payment from an insurance company disability policy?

Question

What are the tax consequences for a lump sum payment from an insurance company disability policy?

Answer 1

It depends on how the premiums were paid in.

Answer 2

It will depend on how you paid the premiums.

If you paid the premiums through payroll deductions and they were deducted before taxes then you owe income taxes on the benefit.

If you paid the premiums through payroll with an after tax deduction then the benefit is tax free.

If your employer was paying for the disability insurance they most likely deducted the premiums as a business expense which makes the benefit taxable.

If you paid the premiums on a personal policy the benefit would be tax free.

Payments or a lump sum won't effect if taxes are owed. However if you are paying taxes a lump sum may place you in a higher tax bracket and cause you to a pay higher percentage.