What is the “Three-Year Look Back” rule and how does it apply to disability insurance benefits?

Three-Year Look Back and Limitations on Taxable Disability Income

The Internal Revenue Services allows tax filers a three year “look back” period on both short-term and long-term disability benefits. This means that after you have paid disability insurance premiums with after tax dollars for three consecutive years, disability benefits received after three years will be entirely tax free.

There are exceptions to the three-year look back period. For example, if become disabled before the three years expires, your benefits will be taxable in the same proportion as the premiums paid.

The look back period does factor in premiums paid by employers. For example, if your employer paid your premiums for one year, and in the following two years, you paid your own premiums, your employer’s contribution would count towards meeting the requirements of a three-year consecutive period. However, since you only paid for two years of premiums, only two-thirds of your benefits would be tax free.

More FAQs About Disability Insurance

  • Do I have to pay taxes on income from Social Security Disability (SSD) payments?
  • My employer pays my insurance premiums for me. Is income I receive from short- or long-term disability considered taxable income?
  • Are benefits from short-term and long-term disability payments taxable income?
  • All FAQs

To get specific advice about your own tax liability from disability income, consult a tax advisor or Certified Public Accountant.