As a result of a lawsuit, the taxpayer received 9 years retrospective disability payments in a lump-sum. In addition, the insurance company deposited $60,000 in the taxpayer's retirement fund. The premiums were 100% employer-paid. Must the T/P pay taxes on the entire amount received, in the year of receipt, or can it be apportioned over the 9 years; and why.
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My Two Cents
I think that the payment is all taxable in the year it is received. There would need to be specific statutory provision for any other treatment and I know of none. The money is of course taxable at all only because the premiums were employer paid. -
Your question really has two parts. The amount received as a lump sum, and the amount deposited as a lump sum into a retirement account.
On the lump sum amount, I would agree it's fully taxable in the year received. The only exception I've found is a special election that can be made for lump sum SDSI (Social Security) Disability. There is a special worksheet that computes the taxes based on the earlier years and forward. Your post seems to indicate this is not an SDSI lump sum.
I'm not sure about the amount deposited into your client's retirement account, whether it will be taxable as withdrawn or immediately taxable. I hope someone else can help with a definite answer. My guess would be it's taxable this year since it was constructively received, and it won't be taxed as withdrawn.
Why is the lump sum taxable in the current year? I'm assuming your client is a cash-basis taxpayer. They report income/expenses in the year paid.Comment
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I could be wrong but
I was assuming that the money in the retirement account would not be taxable until withdrawn. Where are Bees and NYEA?Comment
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Bees is kinda like the "calvary" coming to the rescue, huh? I'm not familiar with NYEA.Originally posted by erchess View PostComment
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