Taxability of Disability Insurance Benefits

[DMICPA]

Taxpayer is a Minister. Church took out a disability policy on client for 80% of salary. Church paid the premiums on the disability policy. I don't know if the premiums were added to the taxable income of the Minister. Have not seen the W-2 forms.

Minister is now disabled after several years with the policy. Starts collecting on the disability policy.

Church says the amounts of disability paid to Minister are taxable income since the Church paid the premiums.

I am thinking that since the Church is a non-taxable entity, the premiums are not taxable. No tax deduction of the premiums that were any tax benefit.


As an aside, I have a disability policy that I personally pay. If I have to collect on it, the amount paid to me is not taxable since the premiums paid were not deducted.

As a church, which is a non taxable entity, why would the Minister's amounts be taxable income.

Anyone have any experience with this?

Bob

[ATSMAN]

I am not sure if rules for Church and Ministers are different. But I have a client who is collecting disability insurance from an employer paid disability policy and that is taxable (no ss taxes). Her employer was a non profit. She gets a W2 with third party sick pay box checked.

[ruthc]

May Be Taxable/Non-Taxable

Usually if the employer pays 100% of the premium without the employee paying anything the total is taxable. If the employee pays (for example) 50% and the employer pays 50% then 50% is taxable if the person goes on disability. The taxable amount shows on the W2.

[JON]

No deduction

If the employer pays or the employee pays and elects pretax then the benefits are taxaable. If the taxpayer (employee) pays with after tax dollars payments are tax free. Years ago there used to be the arguement if you are given the option option by your employer of having disability insurance pre or after tax what should you chose?? The arguement for "after" was always if your disabiled why would you want to be paying taxes on an income stream then. The arguement for "pre" was what are the chances you will ever use it, and you will be in a higher bracket now.

[MAMalody]

The disability rules for the pastor are the same as for any other individual. The big issue here is how were the premiums paid.

[RLymanC]

Disability Ins.

From BJ Worth's guide for ministers:

Premiums for disability ins. paid by the employer are not taxable income.
The income from the plan provided by the employer is taxable as sick pay.
Either the employer or the third party payor must report benefits as salary on Form W-2, subject to the appropriate withholding requirement.

Benefits received by a dual-status minister will be subject to social security unless he is tax exempt, however, if the employee pays the premium for a private disability ins. policy, the cost of the premium is not deductable, and the income from the plan is not taxable.