I have a critical illness policy that I pay for post-tax through my employer. I was diagnosed with cancer and received a payout of 20,000. I was told this was not taxable at the time, but then received a 1099 misc with box 3 filled in for 20,000. How do I account for this in Turbo Tax? Do I have to pay taxes on it?
Generally, income that is derived from post-tax packages are exempt from income tax. Life insurance is an example - you cannot deduct life insurance premiums (your employer's ability to deduct those premiums is limited), so the proceeds of your life insurance policy is tax-free.
Using this same logic, the amount in box 3 on your 1099-MISC should be tax-free. However, you still have to enter this 1099-MISC, because the issuer of the critical illness policy sent a copy of the 1099-MISC to the IRS, who may wonder why it did not appear on your return.
So enter the 1099-MISC, and then offset it with an entry under Less Common Income. Click on what should be the last option, Miscellaneous Income, then click on the last choice: Other reportable income.
Then click on Yes for Any Other Taxable Income, and finally you have a screen where you enter a description of "non-taxable offset for 1099-MISC post-tax payout" (or something like that), and for the appropriate spouse, put the negative of the 1099-MISC amount. This should cause the 1099-MISC amount to be negated on your 1040.
Any questions?
Thank you so much for your response! It is very helpful and descriptive. I will try making those changes and see if I have any issues. You have definitely taken a load of stress of my mind. We had almost 18 grand in medical bills in 8 months, plus will hit out of pocket max every year for a few years, so trying to pay taxes on that would have been crushing.