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daniel-chappell
New Member

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

I became disabled and unable to work, and the insurance company paid benefits before eventually terminating benefits. We took them to court, and they settled before the case went to trial.

1 Best answer

Accepted Solutions
MinhT
Expert Alumni

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

Long-term disability benefits are not taxable when the insurance premiums are paid with after-tax dollars. As the settlement is considered as your long-term disability benefits, it is not taxable. And any legal fees you incurred are not deductible.

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16 Replies
MinhT
Expert Alumni

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

Long-term disability benefits are not taxable when the insurance premiums are paid with after-tax dollars. As the settlement is considered as your long-term disability benefits, it is not taxable. And any legal fees you incurred are not deductible.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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peter07043
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

I have the same situation.  My premiums were paid entirely by me with post tax dollars.  However, just to verify that I won’t owe tax on the out-of-court settlement, I’d like to find this same info on the IRS website.  Can someone point me to this?  I’ve looked high and low.  Thanks.

TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

@peter07043 :

 

See pages 17-19, "Sickness and Injury Benefits", in this IRS reference:  https://www.irs.gov/pub/irs-pdf/p525.pdf

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
billick
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

I have the same situation. I paid no taxes for STD and LTD payments. I received a lump sum as part of settlement in 2019 and received a 1099-MISC from insurance company with Box 3 containing Settlement amount. The remaining boxes are all blank. Do I need to report the income in 1099-MISC? Please advise. Thanks 

TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

@billick --

Yes, you should enter the 1099-MISC into the appropriate section of TurboTax.  Settlements reported in Box 3 of a 1099-MISC are generally taxable.  Per the IRS:

 

Generally, all punitive damages (even if they relate to physical injury or physical sickness), any damages for non-physical injuries or sickness, liquidated damages received under the Age Discrimination in Employment Act of 1967, and any other taxable damages are required to be reported in Box 3.

 

See Page 26, https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf

 

 

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
billick
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

My premiums were paid entirely by me with after tax dollars. Not sure why in my case, my lump sump payment is taxable? 

peter07043
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

See TomD8’s reply above. When I had this issue last year, I verified with the IRS and my accountant that if the premiums were paid with after tax dollars the benefit is not taxable (whether as regular LTD monthly payments or as a lump sum settlement as a settlement of a lawsuit. The monies received from a LTD lawsuit are to be taxed the same as the monies they replaced (normal monthly LTD payments). I would speak to your accountant for piece of mind and have documentation available that proves your premiums were paid with after tax dollars.

TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

@billick --  I agree with @peter07043 but suggest you check with the issuer of the 1099-MISC.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
billick
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

I talked to the Issuer and told me it is taxable. I m really so confused. It really does not make any sense since my situation is not different than anyone else here. 

TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

@billick --  Was your disability insurance coverage obtained through your employer, or was it a private policy that you purchased on your own?

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
billick
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

it was part of my employers long term disability plan. Disability insurance deduction made after-tax every month on my paycheck. When I was receiving my short-term and long-term monthly payments, I was not subject to any tax. 

peter07043
Level 2

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

Your settlement should NOT be taxable based on what you’ve stated. 

TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

If your employer paid any part of the premiums for the disability insurance, at least some of the benefits will be taxable.  See this from the IRS:

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insuranc...

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
TomD8
Level 15

I've settled out-of-court for a long-term disability claim. The LTD policy premiums were paid with after-tax dollars. Is the out-of-court settlement taxable?

- duplicate answer deleted -

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
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