| Is Death Benefit from from Long Term Disability Taxable?
I am assuming that prior to the unfortunate death of your spouse, a disability payment was being received every month. So, when your spouse passed away you received what they call an accelerated death benefit. To determine whether or not the death benefit payments you received from the accelerated disability payment is taxable or not, we need to determine who paid for the premiums.
There are really 3 possible scenarios and here they are:
1. If the Employer paid 100% of the Disability Premium
It is easy to determine this by reviewing your prior years tax return. If the entire disability payments received were reported as income on your late spouse's W-2, then in this scenario it would seem the entire accelerated death benefit becomes taxable on your personal tax return.
2. If both the Employer and your late spouse paid the Disability Premium
If both your late spouse and his employer have paid the premiums for the plan, only the disability benefits attributable to the employer portion that your late spouse had received would have to be reported as income.
So, on our prior years tax return, check to determine whether all the disability benefits were taxable. If some of it was excluded, take the exclusion percentage and apply this percentage to the 2007 Disability payments reported on the 2007 return.
Exclusion percentage is calculated as follows:
Premium paid by your spouse x Total Death Benefits received in 2007
Total Premium paid
3. If your late spouse paid the the Disability Premiums
If your late spouse had paid for the entire cost of the disability insurance plan, I suspect that all the disability benefits would have been excluded on your prior years joint tax return. Thus, none of the Death Benefit would appear to be taxable in 2007.
So, in short, it all hinges on who paid for the disability insurance payments and this is what you need to determine and then accordingly determine which scenario applies to you. | 
