EITC with disability payments

[mblatour]

Hi All!

I've got a client who receives disbility payments for a work comp claim that I am fairly certain are not taxable because she claims to have had a policy when she was working for this past employer. If I look up the Earned Income rules in TTB, Section 11-9, I believe she fits scenario #2, which states:

"Henry is 50 and is receiving disability payments from an insurance policy he purchased through his payroll deductions while he was working. These payments are from insurance and not an employer's disability plan; therefore, they are not taxable and are not considered earned income for EIC purposes".

When running this through my tax software, it's showing that she is qualified for the EIC (she is single, low income and no kids). I just want to be sure I've covered all of my bases here as I'd hate to get this one wrong. EIC due diligence requirements makes me a bit more cautious these days......

Thanks in advance!

[veritas]

What

Hi All!

I've got a client who receives disbility payments for a work comp claim that I am fairly certain are not taxable because she claims to have had a policy when she was working for this past employer. If I look up the Earned Income rules in TTB, Section 11-9, I believe she fits scenario #2, which states:

"Henry is 50 and is receiving disability payments from an insurance policy he purchased through his payroll deductions while he was working. These payments are from insurance and not an employer's disability plan; therefore, they are not taxable and are not considered earned income for EIC purposes".

When running this through my tax software, it's showing that she is qualified for the EIC (she is single, low income and no kids). I just want to be sure I've covered all of my bases here as I'd hate to get this one wrong. EIC due diligence requirements makes me a bit more cautious these days......

Thanks in advance!

are you "running " through your software?

[S T]

Workman's Comp

Workman's Comp is usually a coverage that the Employer is required to have for employees that covers "on the job related injuries" -- The Employer pays for the Workman's Comp coverage based on a $$ per value of payroll paid.

Benefits Usually not taxable to the Employee -- If workman's comp benefit then I do not believe it would qualify for EITC

Disability payments that an Employee receives could be short term/long term , etc and is not always limited to "on the job related injuries" such as Work Comp and the premium could be and most likely deducted from the Employee's paycheck. Say Aflac - since employee paid for premium, would most likely not be taxable income - But you would have to determine if the premiums were pre-tax or post-tax.

Something to look at and investigate though might be a 3rd Party Sick Pay which is usually reported on a W-2 form and noted, Employer Sponsored Plan - which could be a wage continuation and taxable.

Sandy

[Lion]

Pre-Tax?

If she paid for her policy via pre-tax wages, then generally the benefits are taxable to her. If she purchased a policy with after-tax dollars, her benefits may be tax free.

[taxea]

If she has no earned income she does not qualify for EIC. Long term disability is an insurance benefit, not earned income

[mblatour]

more info

Taxea - She [I]does [/I ]have earned income (W-2) to the tune of around $6,000.

Lion & ST - I do need to investigate a little more. I wanted to get some more thoughts stirring so I can make sure I am heading in the right direction and covering all the bases. I'm waiting to hear back from her but I do believe the benefit she is receiving is a work-comp benefit (claim) because of an injury and it is as you (ST) said, it's more than likely not the type of income to qualify her for the EIC......but her $6,000 in wages is what IS qualifying her for the EIC.

Veritas - I am "running" her income/deductions through my software and that is why the EIC is coming up as eligible. But I don't have her work comp payments entered in as a factor because I'm not sure they need to be. I really feel they don't, but thought I'd reach out for other opinions or experiences from the board.

[S T]

W-2 form ??

I think you need to define the income of $ 6,000 being reported. ??? It is either wages, or the possible 3rd party sick pay "employer sponsored" - might even be some accrued payroll sick pay, or accrued payroll vacation pay (wage benefits)

There are a lot of scenarios that i could see.

Is it a W-2 form client received?? If so, who is the issuer ? The Employer or an Insurance Company or 3rd Party??? Do you have Wages in Box 1 - is the 3rd party box checked??? Is there a Code in box 12a - such as "J" with an amount?

Sandy

[mblatour]

more info

Sandy - It's a W-2 for a Home Care Services provider; she works in the office (desk job). It's wages in box 1. It's taxed by F, S, SS and Med. So it's not third party, sick pay, etc. This is not the company she worked for when she had the injury. She's been working for temp agencies for years. This is a regular employer. Regular wages. Taxable and all.

[powerage]

Sandy - It's a W-2 for a Home Care Services provider; she works in the office (desk job). It's wages in box 1. It's taxed by F, S, SS and Med. So it's not third party, sick pay, etc. This is not the company she worked for when she had the injury. She's been working for temp agencies for years. This is a regular employer. Regular wages. Taxable and all.

Looks to me like she qualifies for the EITC, provided all of the other requirements are met. She has earned income.

[Koss]

Income

It sounds like she received a Form W-2 for $6000 in wages.

Is this income the "disability benefits" that are in question?

Or did she receive $6000 in wages plus disability benefits?

If she received wages plus disability benefits, how are the disability benefits reported?

On a Form 1099? Or something else? Or was it not reported at all because it is not taxable?

If she was actually working during 2011, and she earned $6000 in wages, then she qualifies for EIC. The fact that she may have also received some disability benefits does not disqualify her from EIC.

BMK

[mblatour]

I apologize that....

I am not giving all of the information. Worked a 9.5 hr day at day job, saw 3 clients and have finished one return thus far tonight. My brain is in overload mode. Bear with me.....

Koss - see my answers in BOLD

It sounds like she received a Form W-2 for $6000 in wages. Yes

Is this income the "disability benefits" that are in question? No

Or did she receive $6000 in wages plus disability benefits? Yes

If she received wages plus disability benefits, how are the disability benefits reported?
On a Form 1099? Or something else? Or was it not reported at all because it is not taxable? She claims she doesn't get a reportable form; 1099 or anything of the sort. So not taxable?

If she was actually working during 2011, and she earned $6000 in wages, then she qualifies for EIC. The fact that she may have also received some disability benefits does not disqualify her from EIC. That's what I needed to know. THANK YOU!!

[Corduroy Frog]

Hi Ms LaTour

A typical scenario is that during the weeks she did not work, a workers' comp policy will pay a percentage of typical wages. Varies from one state to the next. In my state, "average weekly pay" is calculated for the last 52 weeks, and workers' comp will pay 2/3 of the average wage with an absolute ceiling.

This is "salary replacement." It is earned income, and this person SHOULD receive a W-2 from the insurance company. By its nature itself, does not disqualify her from EIC, but might affect the amount if this increases AGI within or beyond the tables.

"Disability" is something different. Disability may or may not be taxable, but any portion of disability which is "salary replacement" is taxable as earned income unless the taxpayer has refused pre-tax treatment of the premiums (as has already been explained). This does not disqualify her from EIC but might affect the amount similarly to workers' comp.

Take care of the North Shore 'til I can get back up there...

[mblatour]

Hmmmm......

CF -

Client claims to have never received a W2 on the disablity/work comp payments she receives. I've been doing her taxes for about 5 or 6 years (she was previously married and I still do both hers and her ex's) and it has never come to light in any sort of an audit that she is omitting W2 income. That's why I've never questioned her since. But now her regular earned income is very low (she usually takes in about $20K a year) and thus qualifying her for the EIC and THAT is why I feel I need to look at the source of the "work comp/disablity" income more closely.

What makes things even more interesting is that she was able to take out a house loan to buy a home after leaving her husband. She didn't get the loan based on her part time regular wage income alone. They must have been counting her disability/work comp income as well. I'll be talking with her some more this weekend and I'll go over all of this again with her and see if I can get a more clear answer to my question. Thanks for your help!

BTW - the North Shore is just as beautiful as ever. My hubby made the drive up and back every week for 8 weeks due to working on the Grand Marais Public Library. I'd like to get up there again soon. I heard the ice falls at Gooseberry are phenomenal to look at right now.