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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Is Disability Income Taxable?

Resolved Question:

I collect a disability check from Cigna Group Insurance through my employer. It is a significant amount and there is nothing withheld for taxes, SS etc. The only amount on the W2 is box 1. However in Box 13 the third-party sick-pay box is checked. I am wondering if I can claim this as income? Is there somewhere to indicate it is a disability or is it claimed and taxed. If so, at the end of the year I will have received a significant amount to dig up taxes on. My employer told me that I would receive 662/3 of my wage and it would not be taxed. So the amount would be about what I was taking home when working. Is this correct? Do I claim it as income?

Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello vteach,

Who paid the premiums for this disability coverage? Were they paid by you or by your employer?

If the employer withheld the premiums from your paychecks, were the premiums withheld on a pre tax or after tax basis?

On the W-2 form that you received, do they show withholding any amounts for SS or Medicare taxes?

Customer: replied 4 years ago.

My school district paid the premiums. There were no taxes because it is just a long term disability policy that was part of the employee benefits. It is tax free according to the school district financial person. There was no SS or Medicare etc. Only the box 13 was checked which indicated a third-party sick pay.

Expert:  Merlo replied 4 years ago.

Hello again vteach,

When the employer pays the premiums for this type of benefit and those premiums are not included in your taxable income, then the benefits you receive under the policy are taxable income to you. That is not a decision that can be made by the school district. Those are the rules of the IRS. And in fact if these were not taxable income to you, then no W-2 form should have ever been issued.

The part that is strange is that they did not withhold SS and Medicare taxes. With disability benefits it is not unusual that they do not withhold federal or state taxes, but they still should withhold SS and Medicare taxes, and those taxes should also appear on your W-2 form.

Something is very odd about your entire situation here and I think you will need to have your financial person recheck the information you were given. Ask them to explain to you why a W-2 was issued if this is not taxable income, because a W-2 should never be issued if the income is not taxable. And if the premiums were paid for by the school and those premiums were not calculated as part of your taxable income, then you most definitely owe tax on these benefits. But then at the same time they should have been withholding SS and Medicare taxes from your benefits, and then the school should have been matching those taxes the same as they do when you receive regular wages.

Thank you vteach

Customer: replied 4 years ago.

When I asked my school district administrator he said he did not know why I had received a w2. Since I received one what do I do? This check is issued for long term disability until I qualify for SS. What does the box 13 checked have to do with this?

Expert:  Merlo replied 4 years ago.

Hello again vteach,

Box 13 is for informational purposes only. It is always checked when a third party such as an insurance company pays benefits to an employee of one of the firms they provide coverage for. But it has nothing to do in determining whether or not these benefits are taxable to you.

Was the W-2 form issued to you by the school district or by the insurance company?

Customer: replied 4 years ago.

It was issued by the insurance company. Cigna group insurance (life accident disability )is the company. However the W2 says Lina benefit payments, inc.

Expert:  Merlo replied 4 years ago.

Hello again vteach,

Unfortunately without actually being able to talk to the parties involved, I can give you no concrete explanation of why this was issued. It simply makes no sense. When you receive disability payments that are taxable to you, even thought those payments may be made by the insurance company, the employer is the one who is supposed to include them in your W-2 form. And it also makes no sense that they withheld no SS and Medicare taxes from the payments, unless in fact these really are non taxable benefits.

I am afraid you are going to need to contact Cigna and possibly enlist the help of your employer in getting them to void this form, because once that W-2 is issued to you, the IRS considers it taxable income, and there is no way for you to simply not include that as taxable income on your return. It just appears that someone dropped the ball here all around and issued an incorrect form.

Thank you vteach

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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