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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29954
Experience:  Taxes, Immigration, Labor Relations
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I have a legal question that involves a lawsuit settlement I received from a private disab

Customer Question

I have a legal question that involves a lawsuit settlement I received from a private disability firm. I need a California tax attorney familiar with disability settlements to figure out what my tax liability is. I don’t want to get into tax trouble, but want to make sure I’m paying the right amount. My CPA doesn’t know much about my particular situation.
-The lawsuit was to recover benefits from a period of time where the disability company denied my benefits. They owed me about $115K--we settled out of court on $82K. It took a couple years, but I received the money at the end of 2015.
-My employer paid for 100% of the disability premiums--I paid nothing.
-The disability company sent me a W-2 that lists the settlement as wages, tips and other compensation. Shouldn't this have been a 1099 since it was a settlement and not payroll? How have you seen this typically handled?
-The disability company W-2’d me for the full $82K, even though I only got $50K (lawyer took $32K as the
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income depends on the nature of the underlying claim.As that settlement is to replace disability benefits - that award is taxes teh SAME way as underlined disability benefits.Generally - you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer.If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer.So far - based on your information disability benefits are taxable and therefore the settlement that replaces these disability benefits is taxable as well..Another issue is WHEN the settlement is taxable.As you are a cash based taxpayer - the payment is included into your income when constructively received. Income is constructively received when an amount is credited to your account or made available to you without restriction.As the settlement amount was paid in 2015 - it is included into your 2015 tax return..
Expert:  Lev replied 1 year ago.
Regarding HOW to report.You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.So - assuming you are below the minimum retirement age - the settlement correctly reported on W2 form. But for your reporting purposes - it doesn't matter how it is reported.Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A..Regarding attorney fees.That is correct reporting . The full settlement award is considered as paid to you, and then you paid attorney fees.So attorney fees is your expense, and because it is related to taxable income - that payment is deductible on your tax return..I appreciate if you take a moment to rate the answer.Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you will all tax related issues.