Are There New IRS Regulations Impacting the Taxability of LTD Settlements?

I have been offered a lump sum settlement from my LTD insurer. Currently, I have been told that the settlement would be taxable since: 1. There is no tort involved. 2. My employer paid 100% of the premiums. I just read, however, that this February 2010, the Treasury conducted a hearing on proposed regulations to section 104 of the Tax Code that would eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion. Would these proposed changes mean that LTD settlements involving a physical sickness or injury (with no tort) would also be tax exempt? And, because my employer paid all the premiums, is it certain that the settlement would be taxable?

Dallas, TX -

Attorney Answers (1)

Dennis N. Brager

Dennis N. Brager

Tax Lawyer - Los Angeles, CA
Answered

Generally if an employer pays for disability insurance premiums the recipient isn't taxable since you didn't pay tax on the premiums. The pending treasury regulations are as you noted related to 104(a)(2). Disability payments are excluded under 104(a)(3) so I doubt the changes will have any impact on your situation.

The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the State of California. Responses are based solely on California law unless stated otherwise. Any federal tax advice contained in this communication is not intended, nor written to be used, and may not be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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