You are able to receive disability benefits from your private disability plans without affecting your eligibility for disability payments from the Social Security Administration (SSA). These plans pay you if you’re unable to work due to covered illnesses and injuries. Disability benefit amounts from both coverages are based on your earnings while certain factors can cause the Internal Revenue Service (IRS) to tax them.
About Social Security Disability
Social Security Disability program is a federally funded entitlement program. All U.S. citizens are eligible to receive income payments if they have disabilities that last for 52 weeks or longer; terminal illnesses are also covered. Applicants must satisfy other requirements such as having worked for companies covered by Social Security. Currently over 43 million people across the United States receive Social Security Disability and other benefits such as survivors and retirement.
Private Sources of Disability Insurance
You can purchase private disability plans from insurance companies. These plans, unlike Social Security Disability, have insurance premiums that you must pay in exchange for coverages. Premium amounts are based on your risks determined by the insurers. Factors that affect insurance costs include your health, job occupations and coverage amounts. If you are considered too risky, insurance companies may deny you. Income benefits from private disability plans replace between 40 and 65 percent of your pre-disability salaries according to the Life and Health Insurance Foundation for Education.
Private disability plans can be bought to cover short- and long-term disabilities; short-term and partial disabilities are not covered by Social Security. You can buy private short-term disability plans that pay benefits ranging from several weeks up to two years or long-term plans providing coverage for a couple of years or permanently. SSA has waiting periods that last six full months while private STD plans last zero to 14 days and LTD plans last for several weeks to months.
Generally the benefit you receive from private disability plans are not considered taxable compensation by the IRS. This is because your private plans are funded with after-tax dollars. Disability benefits from SSA are normally tax-free however there are instances when the IRS does tax your payments. This happens if you have taxable compensation such as salaries, dividends and interest that pushes your total household incomes past the program’s limits. For example, if your combined incomes exceed $25,000 per year, 50 percent of your SSA Disability benefits are taxed at normal income tax rates and up to 85 percent are subject to taxation if your incomes top $34,000. If you are married, 50 percent of your benefits are taxed if your household incomes surpass $32,000 and 85 percent are taxed when your incomes exceed $44,000.
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