If Laura receives disability benefits from both her employer and a personal policy, which statement about taxation is true?

• A. Employer benefits are taxable; personal policy benefits are not
• B. Employer benefits are not taxable; personal policy benefits are taxable
• C. Both benefits are taxable
• D. Both benefits are not taxable

Answer: (A)

Tax treatment for disability benefits depends on who paid the premiums and whether those premiums were paid with after‑tax dollars. When the employer pays the premiums for disability coverage, the benefits the employee receives are typically taxable as ordinary income because those premium dollars weren’t taxed as income when paid. In contrast, a personal disability policy paid with after‑tax dollars generally has tax-free benefit proceeds, since the money used to buy the policy has already been taxed. So, with Laura’s situation, the employer-provided benefits are taxable, while the benefits from the personal policy are not.