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#87998 - 03/17/06 01:15 AM Taxability of disability benefits
Sousixer Offline
recently joined

Registered: 03/17/06
Posts: 1
As part of property settlement, an ex-spouse received 50% of her former husband's future disability payments. The payments are not taxable to the disabled party because the insurance policy was purchased with after-tax dollars. If the ex-spouse (not disabled) receives her share of the disability payments directly from the insurance company, are the payments taxable or non-taxable to her? Keeping in mind that she is not receiving these payments as a result of her own disability, is she nonetheless treated for tax purposes as if she stepped into the shoes of her disabled ex-spouse with regard to her share? Or are the payments taxable to her under the broad definition of income since no specific exclusion is available to her? [color:"blue"] [/color] <img src="/ubbthreads/images/graemlins/confused.gif" alt="" />

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#87999 - 03/18/06 05:01 AM Re: Taxability of disability benefits [Re: Sousixer]
Gecko Offline
Carpal \'Tunnel

Registered: 06/02/04
Posts: 20602
Loc: Third rock from the sun
I am reasonably sure that they would be taxable to her. Check with a CPA.
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#88000 - 03/20/06 09:32 PM Re: Taxability of disability benefits [Re: Gecko]
Happy Birthday Miranda Offline
Carpal \'Tunnel

Registered: 06/03/05
Posts: 20822
Loc: North of Mexico
I thought disability was off limits??

I also agree with Gecko...it is taxable.


Edited by Miranda (03/20/06 09:33 PM)
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#88001 - 03/20/06 09:38 PM Re: Taxability of disability benefits [Re: Sousixer]
Buckeye Offline
Carpal \'Tunnel

Registered: 12/08/05
Posts: 7873
Loc: OH
I would like to know how ex-spouse receives payments from the insurance company. Something just doesn't sound correct here.

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#88002 - 03/20/06 09:40 PM Re: Taxability of disability benefits [Re: Buckeye]
Happy Birthday Miranda Offline
Carpal \'Tunnel

Registered: 06/03/05
Posts: 20822
Loc: North of Mexico
That is what I don't get either.
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13.1...because I am only half crazy!

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#88003 - 03/21/06 04:20 AM Re: Taxability of disability benefits [Re: Buckeye]
Gecko Offline
Carpal \'Tunnel

Registered: 06/02/04
Posts: 20602
Loc: Third rock from the sun
It's called "disability insurance"...it's like "life insurance", but covers you if you become "disabled".
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If you air your dirty linen in public, expect people to comment on the skid marks!

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#88004 - 03/21/06 12:13 PM Re: Taxability of disability benefits [Re: Gecko]
Buckeye Offline
Carpal \'Tunnel

Registered: 12/08/05
Posts: 7873
Loc: OH
I understand completely about disability but the person getting checks from the company isn't the one that is disabled - at least that is my understanding.

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#88005 - 03/21/06 12:16 PM Re: Taxability of disability benefits [Re: Sousixer]
Buckeye Offline
Carpal \'Tunnel

Registered: 12/08/05
Posts: 7873
Loc: OH
Re-read your post, in other words, this person is not getting checks right now from the company. Let me tell you, she will not get ANY checks from the company. He will be expected to write her a check from his benefits but it is my understanding that the insurance company can only send out benefits to their insured - not an ex.

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#88006 - 03/21/06 12:29 PM Re: Taxability of disability benefits [Re: Sousixer]
catrmm Offline
old hand

Registered: 08/07/05
Posts: 850
There are 2 reasons why I believe that these payments would be non-taxable.

First, generally payments are non-taxable because the policy was paid for with after-tax dollars. IOWs, the tax has already been paid. Further taxation would be double taxation no matter where the payment goes.

Secondly, this is a property settlement and not spousal support.

These 2 factors are unrelated but both would imply that the payment would be non-taxable.

Thirdly, is there a child involved and does the disabled party collect social security disability as well as the disability insurance? If so, the ex-spouse and child(ren) would be entitled to SSDI too which should cause CS to be adjusted. Any payment from SSDI would not be taxable either. It would also not be deducted from whatever the disabled party receives.

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