Many people don’t realize the biggest financial asset they have is their income—it’s your best tool for building long-term wealth. And just like any other asset, you can protect your income with the right type of insurance. Disability insurance pays a portion of your salary if you’re unable to work due to illness or injury, but one big question you might come across is whether disability insurance is tax-deductible.
With disability insurance, you’ll receive payments until you either recover from your disability or you reach the age of 65, though the exact age limit will vary depending on the terms of your policy. Disability insurance is especially important for physicians since one in four 20-year-olds will experience a sickness or injury that could prevent them from doing their job during their careers. It’s also important to understand how this insurance can impact your taxes going forward.
Is Disability Insurance Tax-Deductible?
In most cases, no, paying for disability insurance isn’t tax-deductible. Individual policies are paid for with post-tax dollars, and benefits are paid out tax-free if you ever need to use them. Employer-provided policies can be paid for with pre-tax dollars since it’s a tax deduction for the business.
In this case, the policy will pay out fully taxable benefits in the event of disability. However, self-employed doctors don’t usually have a business structure that allows pre-tax disability benefits.
Are Disability Insurance Premiums Tax-Deductible?
No, disability insurance premiums aren’t tax-deductible. Unlike medical expenses, the IRS considers disability insurance a form of income. So, any money you use to pay disability premiums is taxed as ordinary income.
More information here:Is Disability Income Tax-Deductible?
While any premiums you pay on your disability insurance aren’t tax-deductible, you will receive tax benefits if you ever have to use your disability policy. If you become disabled and your benefits are paid out monthly, that money will be distributed tax-free. Disability income typically pays between 50%-80% of your earnings up to a maximum amount. This will be significantly less money than you’re used to living on, so receiving those funds tax-free is a significant benefit.
Is Disability Insurance Tax-Deductible for Self-Employed Individuals?
If you’re self-employed and you purchased a long-term disability policy, you cannot deduct the premiums from your business income. However, there are exceptions, so it’s a good idea to work with a licensed tax professional who can advise you on your particular situation.
Is Disability Insurance Tax Deductible for an S Corp?
S Corps are corporations that pass any income, deductions, and credits onto shareholders and avoid any double taxation on corporation income. If you own an S Corp and are actively involved in managing the business, you’ll pay yourself a salary. This effectively makes you an owner and an employee of the business.
Disability premiums paid by an S Corp can be tax-deductible, assuming a few conditions are met. First, it has to be a group policy and not an individual policy for one person. The premiums must also be part of that employee’s compensation plan and must be reasonable for the services that the individual performs for the company.
What Insurance Premiums Are Tax-Deductible?
Disability insurance isn’t tax-deductible for most people, but health insurance premiums may be tax-deductible if you itemize your returns. However, this depends on how you pay for your premiums.
For example, if you pay for health insurance before taxes are taken out of your check, you can’t deduct the premiums on your taxes. If you pay for health insurance after taxes have been taken out of your paycheck, you may qualify for a medical expense deduction.
More information here:The Bottom Line
Disability insurance is necessary for all physicians since it protects your income if you’re unable to work due to a disability. The premiums aren’t tax-deductible for most people. But if you’re ever put in a position where you’re forced to use your disability income, you’ll receive the benefit tax-free.
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The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2027); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.
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