Mary is an employee who is covered with a disability income policy through her employer. What are the tax implications of this policy?

The scenario describes a disability income policy provided by an employer to an employee. In this situation, the tax implications for the benefits received under the policy depend largely on who pays for the policy and how the policy is structured.

When an employer provides a disability income policy and pays the premiums, any benefits received by the employee (in this case, Mary) are typically taxable as income. However, if Mary is paying the premiums for the policy using after-tax dollars, any disability benefits she receives would generally be tax-free. This aligns with the principle that if an individual pays for an insurance policy with after-tax income, the benefits received from that policy are also received without tax implications.

In context, saying that residual benefits will be received income tax-free accurately reflects the situation where the premiums are paid by Mary using her own after-tax income. Therefore, under this condition, the correct understanding is that the benefits Mary receives from the policy—if she has been paying those premiums—would indeed be tax-free.

Options relating to tax deductibility of premiums vary based on who pays them and how, but in Mary’s case, the validity of the tax-free status of benefits is upheld when considering her direct contribution to the premium payments.