Have a Tax Question? Ask a Tax Expert
Hi, my name isXXXXX Than you for using our service. Before we get started, please tell me a little about the settlement.
Long Term Disability.
Settled 3 1/2 weeks ago.
My attourney will get 40% and 10,000.00 in expenses. 225,000.00 was the total.
I am single and can not work.
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?
No my employer was paying for my LTD Insurance.
This is not Workers Comp it is LTD.
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.
That is how I came up with the 130,000.00 amount.
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?
Or is it the same one as above?
Are you still there?
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.
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?
Offset all associated expenses, travel, court cost, medical, other miscellaneous. Although, if the settlement is for disability, you should not have a taxable event.
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?
Do any of the court documents or the settlement papers mention the injury? If so, you have a position.
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.
When you say "I have a position" is that good or bad?
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.
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?
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.
I appreciate your patience!
Give me a few minutes to see if I can retrieve a IRS publication that will assist.
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
You officially ROCK Chad. I raelly have appreciated your help and especially your patience. Thank You very much. Have a Great evening.
Thank you. Sometimes the publications are more helpful in that they are written in plainer English.
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.
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) deductionsallowed 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 ascompensation 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 periodicpayments) on account of personal physical injuries or physical sickness;
(3)amounts received through accident orhealth insurance (or through an arrangement having the effect of accident orhealth insurance) for personal injuries or sickness (other than amountsreceived by an employee, to the extent such amounts
(A) are attributable tocontributions by the employer which were not includible in the gross income ofthe employee, or
(B) are paid by the employer)
The following is directly from the IRS
You must report as income any amount you receive for your disability throughan accident or health insurance plan paid for by your employer:
Amounts you receive from your employer while you are sick or injured arepart 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.
IRSCIRCULAR 230 DISCLOSURE: Pursuant to U.S. Treasury Department Regulations, we are now required to adviseyou that any federal tax advice contained in this communication, includingattachments 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.