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Chapter 7
Taxation of Disability Coverage
The important points addressed in this lesson are:
The general rule concerning the tax treatment of disability income insurance premiums and benefits is that if the premium is non-deductible the benefits are tax-free; if the premium is deductible, the benefits are taxable
Disability income insurance premiums paid by an employer on an employee-owned policy are generally tax deductible and non-taxable to employees
Disability income insurance premiums paid by an employer on a policy owned by the employer are not tax deductible, but benefits are received tax free
Disability income insurance premiums paid by an employer on a policy owned by the sole proprietor, partner or more-than-2% S corporation owner are not deductible by the business
Disability income insurance premiums paid by a regular corporation on a policy owned by an employee-stockholder are tax deductible, regardless of the extent of the employee's corporate ownership
Disability Overhead Expense policy premiums are tax deductible to the premium payor, regardless of the type of organization
Although Disability Overhead Expense benefits are taxable when received, their reimbursement of deductible expenses results in a tax wash
Disability buyout and keyperson policy premiums are not deductible to the premium payor
Disability buyout and keyperson benefits are tax free when received
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