How much of a self-employed individual's disability income is typically subject to federal income tax if they are totally disabled?

When a self-employed individual receives disability income from a policy they purchased with after-tax dollars, that income is not subject to federal income tax. This is the case because the premiums for the disability insurance were paid with already taxed income, meaning there are no additional tax liabilities on the benefits received if they become totally disabled.

In this context, a totally disabled individual would not have to report any of their disability benefits as taxable income to the IRS. Therefore, the correct understanding leads us to the conclusion that the amount subject to federal income tax is zero.

Options suggesting specific dollar amounts like $2,000, $1,000, or $4,000 imply that there is a taxable portion of the benefits, which misrepresents the tax treatment of disability income that is received after tax has already been paid on the premium.