Saturday, April 3, 2010

Disability Income

Q I received disability income while I was off from work for several months. Now my employer is telling me I have to pay taxes on that money. Is this true?

A If you receive income for personal injury or sickness, the income is taxable if your employer paid the cost of the premiums for the coverage. If you paid the cost for the disability income coverage, the payments are not taxable to you. If you and your employer both contributed to the payment of the coverage, a portion of the income will be taxable.

If you are covered by an accident or health insurance plan as a part of a cafeteria plan and the premiums were not included in your income, you are not considered to have made the payments, and the income is taxable.

If you receive a pension or annuity for personal injury or sickness resulting from active service in the armed services of any country, the National Oceanic and Atmospheric Administration, the Public Health Service, or the Foreign Service you may be able to exclude the income from taxation.

Amounts you receive as workers' compensation for a work-related injury or illness are fully exempt from tax if paid under a workers' compensation act or statute. The exemption also applies to your survivors. Compensatory damages received for physical injury or illness are not taxable.

Loss of Function Compensation you receive for permanent loss of use of a part or function of your body, or for permanent disfigurement are not taxable. Reimbursements for medical care are not taxable, but may reduce your medical expense deduction.