Disability income may or may not be taxable . . .

If you make the premium payments on a disability income policy, benefits received are not taxable. If your employer makes the payments, the benefits are generally taxable. Those are the two most commonly encountered situations. But there are two variations. First, if your employer makes the payments, but includes the full amount of the premium on your W-2, any benefits your receive are not taxable. Second, if your employer pays part and you pay part, the benefits will be taxable in the same proportion as that paid by your employer.

In a recent letter ruling (LTR 200527012) the IRS held that where the employee could irrevocably elect, before the start of each year, whether the employer would or would not include the premiums in his or her income, the benefits would not be taxable if the employee elected to have the premiums included in their income. Caution. A letter ruling is directed only to the taxpayer requesting it. It may not be used or cited as precedent.