Individuals can spend a lot of money on insurance policies and premiums throughout their lives, so it only makes sense that you would try to recover some of that money in tax deductions where possible. At Beckham Insurance Group, one of the most commonly asked questions we hear is, “Are disability insurance premiums tax deductible?”
Read on to find the answer, or contact us today to learn more.
A Brief Introduction
Deductions are possible for many insurance types and can save individuals a lot of money over time. However, some insurance types do not permit tax deductions for various reasons. One insurance type that individuals may want to deduct premiums from is disability insurance, but does this insurance type permit tax deductions?
To better understand if it does, let’s take a closer look at what disability insurance covers, whether you can claim disability insurance premiums on your taxes, what disability insurance premium tax deductions look like for self-employed individuals, and what medical expense types are eligible for tax deductions before diving into how you can deduct insurance premiums.
What Is Disability Insurance?
Disability insurance is an insurance policy that benefits any individuals who are no longer able to perform their jobs because of a disability. It serves as a safety net for individuals and their families who lose their regular income due to an accident or illness. It is important to note, however, that disability insurance will not make up the total sum of your regular income. Rather, it works to replace a percentage of the funds lost. Typically this sum is forty-five to sixty-five percent of income lost.
Disability insurance is typically offered through employers, Social Security, or insurance companies, and it comes in two main forms: short-term and long-term disability coverage. Premiums for disability insurance are based on several different factors including a person’s age and occupation. For those in higher-risk jobs, premiums will be higher than those in traditionally safer positions.
Further, any benefits you receive through disability insurance payouts are considered tax-free because after-tax money is used to cover the costs of any premiums you have to pay, so the money has already been taxed once.
Claiming Disability Insurance Premiums on Taxes
As per the Internal Revenue Service (IRS), no individuals are permitted to deduct disability insurance premiums or payments as they are designed to replace income. This means that premiums for accident insurance, those for private policies that provide income replacement, policies that pay specific guaranteed amounts weekly for hospitalizations, and others that work similarly are also not able to be deducted.
However, there are a few occasions where deductions are permitted. These include long-term care insurance premiums where medical expense deductions are itemized and claimed on your income tax return, health insurance premiums that business owners purchase for themselves and their dependents, homeowners or renters insurance for business properties, life insurance premiums when they’re purchased for employees and the purchaser is not a beneficiary, and auto insurance premiums may be deducted if you use a personal vehicle for work. This last one is dependent on several detailed records concerning the use and care of the vehicle.
Self-Employed Disability Tax-Deductions
For those individuals who are self-employed with their individual long-term disability insurance policies, they are also not allowed to deduct any related premiums they pay from their taxes. However, if an individual owns their own business and provides disability insurance for their employees, the premiums included are often deductible for the business owner if they cover the cost of the premiums.
Deductible Medical Expenses
While it is not possible to deduct disability insurance premiums for the majority of scenarios and individuals, it may be worthwhile to note that other medical insurances, like dental and vision, may be eligible for deductions if you spent more than 7.5% of your adjusted gross income to cover the premium expenses.
It is important to note that you may not deduct any of these expenses if you don’t itemize your deductions and claim the medical expense deduction.
Deducting Insurance Premiums
Anyone who files tax returns is eligible to claim their set standard deduction. This amount is determined by their filing status and can be impacted by certain kinds of expenses like medical costs. Individuals also have the choice to itemize their deductions instead of settling with a standard choice, but this option is rarely chosen because for it to be worth it, an individual’s itemized deductions must be worth more than what they can receive from a standard deduction–a sum of $12,950 for single filers and $25,900 for married couples.
Typically, only 11% of taxpaying individuals choose to itemize their deductions.
Learn More Today
We hope you found this guide to disability insurance premiums and tax deductions helpful! If you have any other questions or would like to upgrade your insurance policy, contact our team at Beckham Insurance today! We look forward to helping you.