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Ask Chad Oberg Your Own Question

Chad Oberg
Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience:  10 + years of accounting and tax experience, financial statements and business planning
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I am recieving a Lump Sum settlement and would like to know

Customer Question

I am recieving a Lump Sum settlement and would like to know if I can do anything with the money to minimize the taxes. The amount will be $130,000. I am currently living on SS Disability as my only income.
Submitted: 3 years ago.
Category: Tax
Expert:  Chad Oberg replied 3 years ago.

Chad Oberg :

Hi, my name isXXXXX Than you for using our service. Before we get started, please tell me a little about the settlement.

Customer :

Long Term Disability.

Customer :

Settled 3 1/2 weeks ago.

Customer :

My attourney will get 40% and 10,000.00 in expenses. 225,000.00 was the total.

Customer :

I am single and can not work.

Chad Oberg :

Compensation received under a worker's compensation act for personal injuries or sickness and amounts received by a taxpayer under a policy of accident and health insurance are exempt from tax (Code Sec. 104(a)(1); Reg. Section 1.104-1). This is true as long as you did not deduct insurance payments. It doesn't sound like you were paying insurance?

Customer :

No my employer was paying for my LTD Insurance.

Customer :

This is not Workers Comp it is LTD.

Chad Oberg :

LTD is treated the same way. So, it doesn't appear that you would owe any tax on the settlement. If by chance there is some other circumstance that would cause the amount to be taxable, you would reduce the settlement by the attorney's fees and any other associated expenses.

Customer :

That is how I came up with the 130,000.00 amount.

Customer :

So, what you are saying is that you believe that LTD payments are the same as Workers Comp payments. Do you have a tax code that can verify that?

Customer :

Or is it the same one as above?

Customer :

Are you still there?

Chad Oberg :

If any of the amounts would be associated with punitive damages, that amount would be taxable. Also, damages for emotional distress and back-pay are not exclude-able. Section 105 (Reg Section 1.105 covers these situations also.

Customer :

I hope that this is the case. But to be on the safe side is ther anything that I could do if this was taxable?

Chad Oberg :

Offset all associated expenses, travel, court cost, medical, other miscellaneous. Although, if the settlement is for disability, you should not have a taxable event.

Customer :

I really hope you are right. My Cpa said that it would be considered income because it was insurance for my income loss and this is not the case?

Chad Oberg :

Do any of the court documents or the settlement papers mention the injury? If so, you have a position.

Customer :

Yes they do. Based on the fact that the Insuance company denied my claim saying that I was not disabled. We had a lot of medical evidence in our paperwork.

Customer :

When you say "I have a position" is that good or bad?

Chad Oberg :

Without reading these documents, it is hard to say yes or no. Although, based on what you have told me, you would have a very good chance to win.

Customer :

Are you saying that I might have to fight the IRS on this in order to "win"? I am reading these tax codes and have them all up on my screen right now. But I have to say they are not very clear as to LTD. I assume that accident plan is LTD?

Customer :

I have 104, 105-1 and 105-5. Which one says that the LTD(accident insurance) payment that I am recieving is not taxible? I am sorry but I actully feel more confused now than when I started.

Customer :

I appreciate your patience!

Chad Oberg :

Give me a few minutes to see if I can retrieve a IRS publication that will assist.

Chad Oberg :

Long-Term Care

Chad Oberg :

Long-Term Care Insurance Contracts Long-term care insurance contracts generally are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return. See page 17 of the IRS Publication 525 at the following link: http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html?value=525&criteria=formNumber

Customer :

You officially ROCK Chad. I raelly have appreciated your help and especially your patience. Thank You very much. Have a Great evening.

Chad Oberg :

Thank you. Sometimes the publications are more helpful in that they are written in plainer English.

Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience: 10 + years of accounting and tax experience, financial statements and business planning
Chad Oberg and 8 other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Long Term Care is for senior living facilities and not Long Term Disability. You were completely wrong. Were you lying to get my agreement or just confused. Please respond!
Expert:  Chad Oberg replied 3 years ago.
What were the official reasons (IRS code or Publication) that you found that overrides the research? It is always a challenge to make sure that we have every situation that could possibly effect the customer when we are providing an answer. This is why my answer above indicates "generally". There may be some reason(s) your situation is different that I am not aware of at this time. Please let me know what the difference was and what authority that you found that causes a different outcome. I am always trying to do my best for my customers and take extreme care with in my answers.
Customer: replied 3 years ago.
Irs code. I am 44 yrs old and am not in a Long term care facility.
Expert:  Chad Oberg replied 3 years ago.

Customer,

 

These situations can be tricky and there are always multiple factors to consider when trying to determine taxability of LTC and lawsuit issues. The IRS code is not always clear as it really depends on all the circumstances.

 

Make sure to ask your tax advisor questions as it relates to the settlement, especially when it comes to all the expenses incurred with collecting the settlement as they relate to deductibility. Did the employer take the insurance payments as a deductions? This has a profound impact on whether the settlement is taxable.

 

If you have any further quesitons, please do not hesitate to contact me.

 

Thank you,

 

Chad

Customer: replied 3 years ago.
Not "Long Term Care Insurance"... "Long Term Disability Insurance" according to the IRS they are very different. My question was about Long Term Disability. Knowing this .... would you like to try and answer my question again? I will refresh... The Lawsuit has been settled and the total is $225,000.00. My attorney gets 40%. What if anything can I do to minimize the tax implications. Please do not say anything about "Long Term Care Insurance" because this is not a "Long Term Care" settlement it is a "Long Term Disability" settlement. (Huge Difference)
Expert:  Chad Oberg replied 3 years ago.

Customer,

I meant to type LTD above. Therefore the amount does in fact become taxable unless you could prove that the amount of this insurance was included in you compensation or if you could prove that you paid for part of the insurance, which appears did not happen.

.

Please see the following:

IRS Code Section 104. Compensation for injuries or sickness

(a)In general
Except in the case of amounts attributable to (and not in excess of) deductions
allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include:

(1)amounts received under workmen's compensation acts as
compensation for personal injuries or sickness;

(2)the amount of any damages (other than punitive damages)
received (whether by suit or agreement and whether as lump sums or as periodic
payments) on account of personal physical injuries or physical sickness;

(3)amounts received through accident or
health insurance (or through an arrangement having the effect of accident or
health insurance) for personal injuries or sickness (other than amounts
received by an employee, to the extent such amounts

(A) are attributable to
contributions by the employer which were not includible in the gross income of
the employee, or


(B) are paid by the employer)


The following is directly from the IRS

Website:http://www.irs.gov/faqs/faq/0,,id=199752,00.html

You must report as income any amount you receive for your disability through
an accident or health insurance plan paid for by your employer:

  • If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer's payments is reported as income.
  • If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.
  • If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
  • If the amounts are taxable, you can submit a Form W-4S (PDF), Request for
    Federal Income Tax Withholding,
    to the insurance company, or
  • Make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax
    for Individuals
    .
  • Amounts you receive from your employer while you are sick or injured are
    part of your salary or wages.

    If an employee pays taxes on the employer's premium payments, the benefit
    payments will not be taxable.

    In conclusion:

    If the employee does not pay taxes on the employer's premium payments, the
    benefit payments will be taxable. Check to see how the employer reported the payments. If it is part of your compensation you still have a shot at excluding the income.

    If you paid legal fees for a lawyer in relation to making money then he is part of the expenses of making that money and should be deductible against the income under IRS code section 162.The below link is to a site that

    The below website gives some insite also. It comes from the attorney's perspective on how to manage the case. However, it gives very appropriate explanations as how to treat taxable/non-taxable income, attorneys fees and costs and how to possibly approach reporting taxable income.

    http://www.wynperlelaw.ca/documents/Advocates_Conference_LTD_paper.pdf

    Thank you.

    Chad


IRS
CIRCULAR 230 DISCLOSURE:

Pursuant to U.S. Treasury Department Regulations, we are now required to advise
you that any federal tax advice contained in this communication, including
attachments and enclosures, is not intended by the Sender to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

 



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