Disability insurance is a key part of any financial plan because it protects your ability to earn income, which is one of your most valuable assets. If you are injured or sick and cannot work for weeks or more, invalidity insurance will help you regain lost income. This is a very important part of your financial plan because it allows you to pay for the necessary and at the same time save for future goals such as retirement. Are disability insurance premiums deductible?
Disability insurance is probably the most common type of premium that is disregarded as a tax deduction. The deduction of these contributions is complicated.
The Internal Revenue Service (IRS) allows self-employed taxpayers to deduct “general insurance that covers overheads incurred by the company during long periods of invalidity due to injury or illness.” But “you cannot deduct contributions for a policy that pays for lost earnings due to illness or disability.”
If the premium is deducted, any benefits paid under the policy will be considered taxable income. By contrast, benefits from the policy will not be taxable if you do not subtract your contributions, and some taxpayers use this option to get tax-exempt benefits if they become disabled.
Benefits are also taxed if your employer has paid for disability insurance than if you bought them for your own tax dollars.
Can I deduct my disability insurance contributions if I am a business owner?
If you are a business owner, in some cases you deduct disability insurance from taxes. This will depend on the type of business you own, who pays the premiums, and whether they use money before or after tax.
The sole owners cannot deduct disability insurance contributions from their business taxes – just as a natural person cannot deduct disability insurance contributions from his personal taxes.
A sole proprietorship is legally the same as the person who owns it, it is not treated as a separate legal entity. This means that all business income is taxed for the individual.
Disability insurance contributions can be deducted by Corporation S from shareholders or employees who own at least 2% of the business.
If S-corp pays invalidity insurance contributions for one of its employees, it may deduct that contribution from its taxes. An employee may not deduct contributions from their own taxes, but will receive a tax-exempt benefit if they collect it from the policy.
Type C corporations
C corporations can deduct disability contributions from their taxes if they pay contributions on behalf of the employee. Non-employee shareholders are not eligible for the deduction of bonuses.
However, if C-corp excludes contributions from employee income, the benefit will be taxable if the employee collects.
LLC companies operate in the same way as C companies and can deduct disability contributions from LLC taxes. However, benefits may be taxable for an employee or shareholder. If the employee or shareholder pays his own contributions, the benefit will be tax-free.