Story at-a-glance
- Most individual disability insurance premiums are not tax-deductible if you pay with after-tax dollars.
- That’s actually a good thing—because in most cases your disability benefits will be tax-free if you ever need them.
- Employer-paid or pre-tax policies may be deductible, but benefits from those policies are usually taxed.
- Paying your own premium gives you better control and better benefits.
Tax Deduction or Tax-Free Income?
Disability insurance protects your paycheck if you can’t work due to injury or illness. But what about taxes—can you write off the premium?
For most physicians and dentists, the answer is: No, you can’t deduct the premium—but that’s a good thing.
Let’s break it down.
Why You Usually Can’t Deduct It
If you buy your own individual disability insurance policy and pay the premiums with after-tax dollars, the IRS doesn’t let you claim those payments as a deduction.
That might sound like a disadvantage—but here’s the upside:
If you ever become disabled and need to file a claim, in most cases your monthly benefits will be 100% tax-free.
Why Tax-Free Benefits Are Better
Let’s say you have a policy that pays $10,000 a month. If you paid for it with after-tax dollars, you get the full $10,000 tax-free. No income tax, no surprises.
But if someone else paid for your policy—or if you deducted the premium—the IRS treats your benefit as taxable income.
That could mean giving up 20% to 35% of your benefit in taxes.
When Can It Be Deducted?
There are some situations where the premium might be deductible:
- If your employer pays the premium and includes it as part of your taxable income
- If you’re self-employed and use a business-owned policy (like a business overhead expense policy)
- If the policy is part of a group plan and paid with pre-tax dollars
But remember: if you deduct the premium or pay with pre-tax dollars, your benefits will be taxed if you ever collect them.
What Most Doctors Should Do
The best strategy for most physicians and dentists is to:
- Buy an individual policy in your own name
- Pay the premiums with after-tax dollar
- Enjoy tax-free income if you ever need to use the coverage
This gives you the most control—and the clearest outcome if you ever face a long-term disability.
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