Tax law grants tax-free income status to the proceeds from income replacement disability insurance policies. You pay a price for this tax-free income: You may not deduct the premiums. Special treatment applies to overhead disability and also S corporation payments on behalf of “more than 2 percent” shareholders.

Take it from Richard Cotler: if you operate as a corporation, make sure to keep your personal and corporate expenses separate. Asking a court of law to separate your personal and business expenses is an expensive and time-consuming task. And you absolutely should keep the personal expenses clearly identified or, better yet, not on the corporate books at all.

Millard Thomas got hurt on the job and qualified for total disability from his labor union. Properly structured, disability payments for an injury are not taxable. Unfortunately, the labor union filed his disability incorrectly, and his disability pension benefits were taxed.