Tax Law (Questions About Taxes)/LTD settlement benefits

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Question
Hi, John:
Thanks for helping me out with this question. I am getting a lump sum settlement for my LTD benefits that originally were declined. My employer paid for the insurance to cover 50% of my income to be replaced and I purchased another 20%. Will I owe taxes on any part of this settlement when I receive it? Also, I have to give the attorney handling this for me 50%. Is the whole amount they pay taxable to me or just the portion I actually receive? Is the attorney's fee claimable anywhere on my taxes I pay next year?
Thanks again for your assistance in this matter!

Answer
Carol,

Thanks for your question.

The portion of the long term disability payments that came from the part the employer paid are taxable income. It would be the full amount before attorney fees. The portion that you paid is not taxable.

Since some of the income is taxable and some is not, the handling of the attorney fees is somewhat tricky.  Since the attorney fees were related to producing or collecting taxable income, they are deductible on line 23 of Schedule A. Unfortunately, you must itemize deductions and can only deduct the portion of miscellaneous itemized deductions that exceed 2% of your adjusted gross income.

Note that I said "taxable income."  You will have to pro rate the attorney fees between the taxable portion and the non-taxable portion of your LTD payments and deduct only the percentage that applies to the taxable portion.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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