Have a Tax Question? Ask a Tax Expert
Q: it possible to spread a lump sum over several years in terms of tax liability?
A: Unfortunately the answer is no. You will be taxed on the lump sum amount in the year that it is received. SEE BELOW:
Considering the tax implications of your lump sum settlement is also important. Whether you are required to pay taxes on your long term disability benefits is based largely on who paid for the insurance premium. If you paid for the premium with “after tax dollars” then the long term disability benefits are generally tax-free. If your employer paid for the insurance premium or you paid for it with “pre-tax dollars” then the benefit is generally taxable at regular income tax rates. If your benefits are taxable, receiving a lump sum settlement may lead to negative tax consequences, as it would be taxed at a higher rate than if you received the benefit over time. Structuring your settlement to consider the tax consequences is important.
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