CARD Q086
An individual paid all premiums for a disability-income policy with after-tax money. How are benefits generally treated for federal income tax?
- They are excluded from income
- They are taxed as capital gains
- They are always fully taxable
- Only the first benefit is taxable
They are excluded from income
After-tax employee or individual funding generally produces tax-free benefits. Employer-paid or pretax funding can produce taxable benefits.
Why each choice is right or wrong
A. They are excluded from income
Correct. After-tax employee or individual funding generally produces tax-free benefits. Employer-paid or pretax funding can produce taxable benefits.
B. They are taxed as capital gains
Incorrect. Ordinary disability benefits are not capital gains in this scenario.
C. They are always fully taxable
Incorrect. After-tax individual funding generally produces excluded benefits.
D. Only the first benefit is taxable
Incorrect. There is no special rule taxing only the first benefit here.
Review the related terms
Use these lessons to revisit the concepts and try additional practice questions.