Are Long-Term Disability Benefits Taxable?
Where can a person find stable financial support if a serious medical condition prevents them from returning to their jobs? Depending on their insurance coverage, people who have sustained disabling injuries or prolonged illnesses that make it impossible for them to work may be eligible to collect long-term disability benefits.
In Canada, long-term disability insurance plans usually provide disabled workers with regular monthly payments covering between 60-70% of their normal wages. In order to qualify for these benefits, eligible applicants may be required to use up any other coverage options available to them before submitting a claim. These other options may include paid sick leave, vacation time, short-term disability benefits, and even EI benefits.
Monthly long-term disability benefits payments can provide a much-needed financial safety net for those who would otherwise be unable to get by. Disability benefits payments can help workers prioritize their ongoing medical treatments during a difficult period of time, when their conditions prevent them from earning a pay cheque. During times of great medical and financial anxiety, long-term disability benefits can be a life-saving source of income.
But, when it comes time for a benefits recipient to submit their tax return, are disability benefits technically considered income? Are recipients required to pay taxes on the benefits they receive?
In the majority of cases, the answer is: Yes. However, depending on who paid the premiums for their insurance policy, people collecting long-term disability payments may not be required to pay taxes on them.
If Your Employer Pays the Premiums, You Must Pay Tax on Benefits You Receive
It is typical to pay taxes on all forms of income you receive from your employer. In Canada, employees are required to pay taxes on their wages, bonuses, vacation pay, and other forms of compensation for their work.
That said, if your employer provides their staff with insurance coverage through a group plan, your employer might pay the full cost of each employee’s monthly premiums for that plan. If that is the case, your employer would, therefore, pay the requisite taxes on the plan’s monthly premiums. This means that staff members on the employer’s payroll would receive the benefit of their group insurance plan’s coverage without having to pay taxes on the monthly cost of that coverage.
However, if you are diagnosed with a disabling medical condition and cannot work as a result, you may be required to take advantage of your insurance plan’s long-term disability coverage. If your claim for benefits is successful and you begin collecting payments, since your employer paid the full cost of your insurance plan’s premiums, you will now be required to pay taxes on any benefits you collect from your insurer.
In some workplaces, people who pay into their employer’s group insurance plan may be required to pay for their policy’s monthly premiums on their own. In these situations, if an employee has already paid the monthly cost of their insurance premiums (and by extension, the requisite tax on those premiums) and they need to collect disability benefits, they will not be required to pay tax on the payments they receive.
Some employees split the monthly cost of their insurance coverage with their employer. In these cases, the employee who needs to collect disability benefits would be required to pay tax on the portion of their plan covered by their employer.
Not everyone receives robust insurance coverage through their employer. Self-employed individuals, or people who don’t receive adequate insurance coverage through their employer’s group plan may choose to purchase their own private insurance coverage. In these situations, since individual policyholders have to pay the full cost of their plan’s monthly premiums, including any required taxes, if they do need to collect disability benefits after receiving a disabling medical diagnosis, the money they receive will not be considered taxable income.
Since many disability benefits are subject to taxes, if you are receiving long-term disability payments, you may owe income tax when you file your next return. It is important to save enough money to cover any taxes you may owe at the end of the year.
Are CPP Disability Benefits Considered Taxable Income?
People with medical conditions that prevent them from working may also be able to receive financial compensation from the Canada Pension Plan (CPP). You may be eligible to receive CPP disability benefits if you meet the following criteria:
- You are under the age of 65
- You have contributed enough money to the CPP over time
- You have a mental or physical disability that prohibits you from doing substantially gainful work
- Your medical condition is long-term or indefinite
If you receive CPP disability benefits in addition to long-term disability benefits from your insurance plan, your insurer may reduce the payment amount available to you. This is called “offsetting” benefits. This means that, even though you have coverage from more than one policy, the combined total cost of that coverage will not increase. Instead, the payment amount from one policy will be used to offset the payment from the other.
CPP disability benefits are taxable income. Oftentimes, federal income tax is automatically deducted from the monthly payment amount issued to eligible recipients. Our long term disability lawyers in Nova Scotia and New Brunswick can help to answer additional questions and represent you.
How to Determine Whether or Not You Need to Pay Tax on LTD Benefits
Although the differences between policies and the various circumstances in which policyholders may be required to pay tax on benefits may sound confusing, in truth, insurers make this determination quite simple for benefits recipients.
If you are required to pay taxes on your disability benefits, your insurance provider should most certainly let you know. Often, the taxable amount will be automatically withheld from the total cost of your monthly benefits payment. Your insurer should also provide you with the proper documentation you’ll need to report the correct amount on your tax return.
Having a firm grasp on your financial situation, including the amount of tax you may be required to pay after your annual return is assessed, can help you create an accurate monthly budget. This is especially beneficial for those who are unable to earn their normal salaries because of disabling medical conditions, and may be carefully monitoring their finances.
If you have any questions about your insurance policy or taxes you may be required to pay on benefits you’re receiving, a Nova Scotia long-term disability lawyer may be able to review your plan and offer guidance in a free, initial consultation.
Tax Credits That May Be Available to You
For people living with disability, especially those who rely on long-term disability benefits, maintaining financial independence can be a challenge. If you are only able to collect a percentage of your regular salary, keeping track of every expense and tax owed, as well as any opportunities for savings, can help you plan for the future.
The Canada Revenue Agency (CRA) makes certain tax credits available to eligible taxpayers to relieve the financial burden that may result from their inability to work.
If your medical condition prevents you from performing the duties of your job, you may qualify for the following tax credits:
- Disability Tax Credit: Reduces a person’s total income tax payment amount.
- Medical Expense Tax Credit: Provides compensation for certain medical costs, including prescriptions, treatments, assistive devices, and possibly more.
- Disability Supports Deductions: Deducts costs of personal care providers from your income taxes.
- Federal Excise Gasoline Tax Refund Program: Provides a refund on the tax paid for gasoline if you have a mobility impairment and cannot use public transportation.
- GST Exemptions: Taxes on certain goods and services may not apply to people living with disabilities.
- And more
More Questions? Call Preszler Injury Lawyers
If a physical illness, severe injury, or serious mental health condition prohibits you from working for a lengthy period of time, you may be eligible to receive long-term disability benefits. If you have questions about your long-term disability plan, Preszler Injury Lawyers may be able to review your policy and explain the options that may be available to you.
To review your case in a free, initial consultation, contact Preszler Injury Lawyers today.