How much of the $2,000 monthly income received by a self-employed individual with an Individual Disability Income policy is subject to federal income tax if he becomes totally disabled?

When determining the tax implications of individual disability income benefits, it is essential to consider how the premiums for the policy were paid. If a self-employed individual pays for their Individual Disability Income policy premiums using after-tax dollars, any benefits received during a period of total disability will not be subject to federal income tax.

In this scenario, since the individual is receiving $2,000 per month from the disability policy, and if they paid the premiums with after-tax income, the entire amount is tax-free. Thus, none of the $2,000 monthly income is taxable, leading to the conclusion that the correct amount subject to federal income tax is zero.

This tax treatment incentivizes the purchase of disability income insurance, as it provides financial security if an individual becomes unable to work due to a disability, all while maintaining tax efficiency on the income received from the policy.