Winning Isn't Easy: Long Term Disability ERISA Claims

Episode 33: The Intersection Of Long-Term Disability & Personal Finances, Part 1: Taxability & Overpayments with Larry Weinstein

August 17, 2021 Nancy L. Cavey Season 2 Episode 2
Winning Isn't Easy: Long Term Disability ERISA Claims
Episode 33: The Intersection Of Long-Term Disability & Personal Finances, Part 1: Taxability & Overpayments with Larry Weinstein
Show Notes Transcript

Episode 33: The Intersection Of Long-Term Disability & Personal Finances, Part 1: Taxability & Overpayments with Larry Weinstein

Speaker 1:

[inaudible]

Speaker 2:

Hey, I'm Nancy, maybe a national Orissa and individual disability attorney welcomed a winning isn't easy. Before we get started, I've got to give you a legal disclaimer. The Florida bar says, I've got to say this, so it's not legal advice. And in fact, my guest today is an account that he won't be giving you any accounting advice either, but nothing prevents my guests , Larry Weinstein and myself from giving you an easy to understand overview of the disability insurance world, the games, the carriers play and what you need to know to get your disability benefits that you deserve. And today we're going to be talking about , uh , the taxation or taxability of Arista disability benefits. This is the time of the year that this becomes an issue. So off we go. So, Larry , um , thank you for being my guests . Could you give us a little background about who you are, why you do what you do and how you've come to be the CPA for a lawyer such as myself?

Speaker 3:

Well, thank you for the introduction, a little bit of the introduction, Nancy, and thanks for having me on, I know that we'd go back a long way back into probably the mid two thousands, two thousands, 2005, 2006. We met at a conference. Uh, my name is Larry Weinstein. I am a CPA. I've been a CPA for about 32 years and I specialize, I do a lot of tax work. Uh , I work with a lot of lawyers doing taxation for lawyers, mostly solo and small firm. And , um , I just love working with taxes and I still do some accounting work, but working and trying to help people legally keyword here, legally minimize their taxes, structure , their affairs. So they , uh , have the least taxes that they have to legally pay crazy .

Speaker 2:

Okay , great. Well, as a, an Arista disability attorney, one of the questions I always get is are Rissa benefits taxable, and I say, I'm a lawyer, I'm not an accountant. So go talk to your accountant about that issue. So Larry are Reza benefits, taxable.

Speaker 3:

Generally the answer to that is yes, because the , uh, theorists , um, the insurance premiums paid by the company are tax deductible. Therefore when the benefits pay out , uh, the disability benefits pay out to the employees, they have taxable income. So,

Speaker 2:

So one of the things, yeah. So what are the things that I know is that if the person pays for it with pre-tax dollars, it's treated differently than if it pays the premium with post-tax dollars . So can you explain that to us?

Speaker 3:

Yeah, it's uh , um , it, actually, when you understand it, it does make sense. Uh , there's two ways in which the premiums can be paid. Uh , like what we just talked about, the Arista benefits, those are actually paid for by the company. And I guess what you're talking about is either a longterm or short term , um, policy. So that's a tax deduction for the company, but when the employee , uh , collects on those disability payments , um, they're basically receiving income and you understand that income is generally taxable. So that's what's happening. There was a tax deduction. So there is no , um, there's no real benefit to the employee. They do have to pay tax on it. Now on a private, did you have a question on a private policy? I think you're calling them an IDI and individual disability income policy. Those are paid for, as you started to talk about with after tax dollars and because they're paid with after tax dollars in the event that they collect on that disability insurance, they're going to get paid , um , in , in they're going to get paid, but they're not going to have to pay tax on it. So it would not be taxable. So

Speaker 2:

Let's say an employer offers me a disability insurance policy or plan. Uh , they just sponsor it, but I actually pay the premium and the premium comes out of my paycheck. Uh, in that instance, if I collect my Arista shorter long-term disability benefits, are those benefits taxable. Uh, if I am paying for them out of my pocket with , um, post-tax dollars or are they taxable if I'm paying for, with pre taxable dollars ,

Speaker 3:

Um, let me ask you a question about that at that point, would, would the , um, with the employee be paying a hundred percent or would they be poor being, paying a portion?

Speaker 2:

Well, that's a great question for the purposes of this first question. Let's assume that the employee's paying 100% of the premium doesn't matter for tax purposes. If that premium is deducted before tax or after tax ,

Speaker 3:

Uh, getting back to the overriding , uh , theory that we talked about earlier, if it's being paid with after tax dollars and it's being paid a hundred percent by the employee, I believe that , uh, at the end of the day, if the employee actually collects on it, it would be as if you paid for it individually out of his own pocket. So it was being paid.

Speaker 2:

So it's not tax ,

Speaker 3:

It would not be taxable because it's being paid with after-tax dollars and it would not be taxable.

Speaker 2:

Okay. So let's , uh, turn the situation around a little bit. Let's say that , um, the disability carrier is paying , uh , benefits and that they are taxable benefits to the employee. Should the , the, the, the employee policy holder ask the disability insurance company to do the tax withholding for them like an employer would or should the employee policy holder do their own , um, uh, withholdings and pay an estimated tax payment,

Speaker 3:

Right? That's a good question, Nancy. And it could go either way at the end of the day, the IRS, honestly, doesn't care. Uh, the IRS they're going to look, we have, what's called a pay as you go pro uh, program with the IRS. They want you to pay your estimated payments on a pro rata basis as you are in the money. Uh , let's just say, on a quarterly basis. So the IRS doesn't really care how it happens. They just want to see that it happens. So it just really depends. If, if you can get the Arista carrier to do the estimated payments, and I've seen that done where they'll get almost like a W2 with withholdings on it, that's , that's easiest for the employee to do, but if the, if the employee doesn't want to do that, because that is the easiest, if they don't want to do that, then they still have an obligation to make those estimated payments. And there are four quarterly payments. Uh, the first, one of the years due on four 15, April the 15th, June the 15th, September the 15th, and then January 15th of the following year. So as long as it gets done, the IRS doesn't really care. But I would say for the employees, especially if they they've never really done estimated payments, it would be a better deal to let the , uh , the insurance company do it for them.

Speaker 2:

Okay. All right . So one of the things that will happen is that there might be an overpayment of long-term disability benefits because the person also was getting work , ultimately got social security, disability benefits. So the LTD carrier says, look, your payment was $5,000, but you collected social security of three. We only should have been paying you two we've overpaid you. Um, is that overpayment going to be considered taxable? Because the way the employee policy holder has to write a check out to the disability insurance company to repay them for this overpayment. So w explain to us the taxation issues here.

Speaker 3:

Oh, that's, that's an interesting , I've not, honestly, I've not seen that. Do you see that a lot? Oh , really. I've not seen that a lot. That might be a deduction. A, there might be a deduction. What we call above the line, like an adjustment to income , uh , that they would be able to deduct that to make it not taxable, honestly, might have to get back with you on that to give you a definitive answer. That's, that's a weird one, but I will, I did , uh, do a , um, a , uh , an amended tax return for a client. If I could bring this up, which is kind of similar is I had a client in which they received disability benefits. And ultimately they got a lump sum from social and they had to , uh, they basically had to settle up with the IRS because they had already paid tax on the socials on the , uh, the income that they receive from disability. Like we've talked about that. So they got that benefit and they pay tax on it, but on the social security, because it was a lump sum for a number of years, they actually , um, they generally would have had to pay tax on that also. But if you've ever seen a 10 99, I think it's called an SSA from social security. It actually states. And a lot of people don't pay attention to this, but it will, it will state the years in which they're being paid for because they got a lump sum. Let's say it was 50 or $60,000, but it was for three years. And there is a, there is an internal revenue code, 1341 that you can actually get a credit for those taxes that you already paid. And that keeps you from paying double taxes, because remember you paid tax when you got the money on a W2, the , um , the disability income and pay tax on it, and you get a credit for, so you don't pay double tax. The , I haven't seen that many times in practice, but that's something interesting.

Speaker 2:

Let's take a quick break and I'm going to pepper you with some more questions about the taxation of , uh, uh, social security, disability benefits and the taxation of , uh, disability insurance benefits. All right . Okay.

Speaker 4:

Are you a professional with questions about your individual disability policy? You need the disability insurance claim , survival guide for professionals. This book gives you a comprehensive understanding of your disability policy with tips and to do's regarding your disability application that will assist you in submitting a winning disability application. This is one you won't want to miss for the next 24 hours. We are giving away free copies of the disability insurance claims survival guide for professionals order yours [email protected]

Speaker 2:

All right, welcome back to winning isn't DV . So Larry, the another question I get all the time is look, I apply for social security disability benefits on I alleged that I was disabled in , uh, 2019. The social security administration ultimately agreed in 2021, that I was disabled back in 2019. Now I've filed my income tax return for 2019. Um, is this retroactive social security check going to be taxable? And if so, what year? And I know you touched on that a little bit before we took a break. Could you expand on this for us?

Speaker 3:

Uh , I've always seen that it would be taxable new that you received because you're a cash basis taxpayer. Um , I've never seen where you go back and amend the return to pick up , um, the, the , the income for the previous year. And the reason being is because you're getting a 10 99 SSA from the IRS and it's for X amount of dollars. They expect to see that on the current year, the current year return we're social security issue that a 10 99 SSA,

Speaker 2:

Okay, now I get this question all the time. Uh , we're in a mediation, we're going to settle this LTD case. And they turned to me and they say, is my settlement taxable? What's the answer?

Speaker 3:

Social security disability

Speaker 2:

Long-term disability, insurance pug case gets settled. So they get a lump sum buyout of their , the insurance policy is that settlement taxable, because after all it's for , uh , it's for disability benefits,

Speaker 3:

Okay. Who paid for the policy? It gets back to before, was this a , was this a company , uh, provide a policy or was it an individual policy?

Speaker 2:

That's a good question. So let's break it up. Let's say that it's an Arista based policy and the employer pays a hundred percent of the, of the premium, but is that's settlement going to be taxable? Yes, it would . Okay. So let's say that the a hundred percent of the premium has been paid by the employee policy holder and they settled their disability case. Is that settlement taxable?

Speaker 3:

No. Okay . Because it was paved the way you just described it. I think there was paid with oh , with after tax dollars, correct? Yep .

Speaker 2:

So now I'm going to give you the one in between , let's say you have an Arista disability policy and the employer much like they may do in a group insurance situation contributes a portion of the , uh , Orissa premium. So they may pay half of it. And the other half is paid by the employee in that situation, if they settle their LTD case , uh, is it taxable? And what portion is taxable?

Speaker 3:

I think in that case, that will be a prorata situation that the portion that was paid for by the employer would be taxable and the portion. And then there have to be a calculation done. The portion that was paid with pre-tax dollars by the employee would not be taxable. That's the same, the same rules apply.

Speaker 2:

Okay. Now the other question I get is I have to pay your attorney's fee Gabby , and you've got these costs for a functional capacity evaluation or an IME or a filing fee for the court case. Tell me Ms. KV , uh, are your attorney's fees deductible on my income tax return?

Speaker 3:

That's a good question generally, or what's always been until 2018. There was a big a tax act that president Trump signed into law. The very end of 2017. It used to always be that, that , um, the attorney's fees related to preserving or, or receiving the production of income were deductible as what was called an other itemized deduction. And that would be deductible as an itemized deduction on schedule a with all of the other itemized deductions, such as real estate taxes, mortgage interest, charitable contributions, to the extent that exceeded 2% of adjusted gross income. So I guess at that point, it would really, it would really make a difference as to how much the attorney's fees were , uh, were, would it be deductible now, there is an adjustment. Um , there's an adjustment that could be done above the line. Uh, it's an adjustment to income that it could be deducted on. Okay .

Speaker 2:

Now the next question I get it relates to the cost. So Ms. KV , you spent $2,000 in costs with a filing fee, getting the IME are those costs associated with the settlement of my case, deductible on my income tax return.

Speaker 3:

I'm not familiar with that. And my , my gut reaction on that would be no, because that's not a term, that's not attorney's fees. Um, what , what do you think about that? I, I don't think that I don't think those costs would be deductible. This , they sound personal in nature to me.

Speaker 2:

I don't know the answer. That's why I'm asking the expert here, because that's that I get all the time is, are those costs deductible? And I said , talk to your accountant.

Speaker 3:

I think, I think the attorney's fees are, I don't know about the cost , like the filing fees and stuff like that. I'm not sure how, I don't know how big those would be.

Speaker 2:

Okay. So what advice do you have for , uh, folks who are applying for , uh, or their Orissa disability insurance benefits and want to know whether or not those benefits might be taxable or not, and what they have to do to protect themselves from a big tax bill?

Speaker 3:

Well, I think it gets back to what we were talking about earlier. If it's an Arista claim, the premiums are paid for by the , uh, uh, by their employer and the employer took the tax deduction for them, then they just need to plan that, I guess if they're using you, not if they're successful, but when they're ultimately successful, that that they're going to , um, they're going to have to have some tax on that. I don't know how to get around that at the end of the day. Um, we had talked earlier, get, get the insurance company , uh, the carrier to make estimated , uh , tax withholdings or tax withholdings. So you don't have to make those estimated payments. Um, you know, I do some work with , uh , IRS problems situations, and , uh , you've got somebody that's a wage earner that just gets a W2 paycheck, and maybe they've got a little bit of interest in dividends, but most all of their income comes from their employer. They're not real used to making those estimated tax payments. So all of a sudden they're getting this money that they're getting this disability income and there's no money that's been withheld. Um, they're gonna come up short at the end of the year and that's going to cause a tax problem for the ,

Speaker 2:

So Larry, if somebody looked at their pay stub, would that pace help tell you as an accountant, whether or not the premium for their disability insurance policy has been paid with pre-tax dollars or post tax dollars?

Speaker 3:

Uh, it would probably say , uh , you're on the , uh, on the detail. I think that it would, it would, it would say pre-tax it , it would definitely if it was paid with pre-tax dollars or after tax dollars, I think that would say that on this base stuff , it would also show you , um, when they're getting the benefits it'll show on the, on the pay stub , it show the tax withheld. So you, you would know like what we were just talking about. If, if your carrier is making the estimated pay , uh, basically doing the withholdings. I won't say the estimated payments, but if the carriers making the withholdings you'd see that as federal income tax withheld on a pay stub. So ,

Speaker 2:

Uh, if I were to tell my clients to consult with an account such as you to determine whether or not their benefits were taxable before they apply for benefits or before they decided to deal with withholdings , uh , what information would you need to help them help determine whether there a disability insurance benefits are taxable or not?

Speaker 3:

I think getting back to the basics is I would need to know, is that an employer sponsored plan where the employer pays a hundred percent of the money, or was that , um, was that money that you paid for? It was , uh, you know, with, after tax dollars , uh, you know, and there was withheld from the employer. And I guess the way you're asking the question, this would be something employer related, as opposed to their own individual disability insurance policy, which in that case would not be, would not be,

Speaker 2:

But I'll get there in a second. But so probably the answer is, yeah, I want to see your pay stub to see, you know, before you stop working, apply for benefits, what that pay stub says about where who's paying the premium and if it's with a post tax or pre-tax dollars, but they probably should go to HR and find out that answer to would that, would that be appropriate?

Speaker 3:

That would be it , they should be able to give them a good answer. That's correct. But can I ask you a question? Um, you're, you're asking a question about the taxability of the benefits. If somebody is truly disabled , um, aren't they going to just go and try to maximize the benefits that they can, regardless of what the taxation is , uh , whatever the tax that they have to pay. That's not going to affect how much money that they receive and if they're entitled to the money, wouldn't they just get that?

Speaker 2:

Uh , well, it does make a difference. So for example, I represent people in New York and the state of New York has , um, their own disability insurance benefits that the state will pay. So the person may get disability insurance benefits from the state. They may get short and long-term disability benefits from their disability carrier. They may get social security, disability benefits. And so the question often becomes are of these benefits taxable. And if so, how much should I do withholdings ? And so there are, there are states where , um , maximizing income can also mean maximizing tax liability. Larry, I'm going to give you a little twist on this , um, and I'm sure you've seen this in your practice. Um, we both represent professionals such as doctors and lawyers and , um, and other , uh, professionals , um, and they purchase a disability policy, but they have their business pay the premium as opposed to them paying with a post-tax dollars. And in your experience, based on that scenario, would the Arista or ID benefits become taxable because they are being paid? The actual premium is being paid by the business?

Speaker 3:

Yeah, I think getting back to the general rules, if , if there was a tax deduction and I would suggest that somebody that's kind of a, can I use the word like suckers bed , it's like not a smart thing to do to get a little bit of a tax deduction , uh, when you're going to get a whole bunch of taxable income, if you ever have to pay if that policy ever has to pay off. So yeah, to answer your question, if, if they got a tax deduction, then they're going to have taxable income.

Speaker 2:

So in closing, what advice do you have for , um , uh , people who are thinking about applying for their Reza disability benefits are supposed to go to disability benefits and they're concerned about the tax implications of those benefits. What advice would you give them?

Speaker 3:

Well, first as I understand it, and this is your Bailey wick, I would , uh, I would consult with a good Arista disability lawyer to make sure that you would get the benefits that you're entitled to. Cause I'm guessing from, from knowing you and speaking with you , uh , a lot of the insurance companies like to like, they like to collect premiums, but they don't like to pay out claims. So to get what you're entitled to, I'm not trying, I'm not suggesting that you're ripping off the insurance companies, just getting what you're supposed to get. Um, it sounds like a bit of a challenge or you wouldn't have a job at all. Um, but at the end of the day , uh , when you start to file a claim, you you'd have to ask the questions. You have to either ask your HR, people, ask an accountant, take a look to see who's been paying those premiums. Is, has the company been paying the premiums? Um, or have you been paying them with after tax dollars, either through the company or an individual policy in your own name?

Speaker 2:

Great, Larry, I thank you for your time and your insight today. If you've liked this podcast, consider liking our page, leaving a review or sharing it with new friends and family. Remember our podcast comes out weekly. So tune in next week for another episode. And Larry, if somebody had a question , uh, and wanted to contact you or use you as an accountant , how would they get ahold of you? Well, my ,

Speaker 3:

Uh, my website is a tax Terminator, hq.com and , um , th they want to reach out to me on an email. They can , uh, go to [email protected] Great . Thanks, Larry. Thank you very much. Take care. Bye-bye bye-bye.