Identification

• The first thing you must do is determine whether you are receiving sick pay, qualified long-term care insurance benefits, accelerated death benefits from a life insurance policy, worker's compensation or disability pension. Each has its own implications.
  
  

Significance

• Sick pay and disability pension are generally taxable. Worker's compensation, accelerated death benefits from life insurance policies and qualified long-term care insurance benefits are usually not taxable. Whether or not an insurance plan is qualified is discussed in detail in the IRS instructions for a 1099-LTC. Disability pension that is received before retirement age is taxable as wages, while after retirement age, it is taxable as a pension. Be aware that there are particular rules that may make disability pension non-taxable for military and government disability pensions. See IRS Publication 525 for details.
  
  

Exceptions

• There are exceptions to every rule. Sick pay is not taxable if it is worker's compensation or if the payments are the benefit of an accident or health insurance plan that you pay for. If you pay for a portion of the plan, that portion of the benefits will not be taxable.
  
  

Features

• You should receive a W-2 if your long-term disability benefits are taxable to you. You also have the option to file a form W-4S with the insurance company that is issuing the payments to have taxes withheld. Both forms are available from the IRS website. Alternatively, you can file a 1040-ES to make estimated tax payments yourself and avoid a liability and possible penalty at tax time.
  
  

Warning

• This information is based on IRS rules, but every state and locality has its own tax laws, so be certain to check with the website of the individual taxing authority to verify how it will be treated at those levels. Tax laws change often, so always verify the information with your tax professional.