disability payments

[kbe]

What is the name of your state (only U.S. law)? kentucky

My husband settled in a personal injury civil action (active duty military connected but not combat related). The settlement states that the compensation he will receive will qualify under section 104 (a) (2) of the "Code". The settlement is paid out of an annunity which was agreered upon through a qualified assignment. The qualified assignment falls under section 130 (c) of the "Code", however the qualifed assignment does state that the payments will be qualified under section 104 (a) (2) of the "code". I am by no means an expert with tax law, so with that said, here I am (last night) reading IRS tax code and freaking out. Section 104 (a) (2) qualifies his settlement payments as non-taxable (right?). Ok, now it gets complicated. My husband also receives VA disability benefits (which he applied for after the civil settlement). I read on down to (4) of section 104 (a), then to (b) (2) (D) that says he is classified as (4). Now I look at (b) (4) and this is the freak out part. My husbands monthly settlement payment is less than his VA disability monthly benefit payment. SO, my question(s to you, is his settlement payment now taxable and includible as income? Like if I'm filling out an application of any sort and it asks to list my annual gross income and any other income, do I have to list any of his above mentioned payments as other income? It's not considered income if it's not taxable, right?

 

[LdiJ]

What is the name of your state (only U.S. law)? kentucky

My husband settled in a personal injury civil action (active duty military connected but not combat related). The settlement states that the compensation he will receive will qualify under section 104 (a) (2) of the "Code". The settlement is paid out of an annunity which was agreered upon through a qualified assignment. The qualified assignment falls under section 130 (c) of the "Code", however the qualifed assignment does state that the payments will be qualified under section 104 (a) (2) of the "code". I am by no means an expert with tax law, so with that said, here I am (last night) reading IRS tax code and freaking out. Section 104 (a) (2) qualifies his settlement payments as non-taxable (right?). Ok, now it gets complicated. My husband also receives VA disability benefits (which he applied for after the civil settlement). I read on down to (4) of section 104 (a), then to (b) (2) (D) that says he is classified as (4). Now I look at (b) (4) and this is the freak out part. My husbands monthly settlement payment is less than his VA disability monthly benefit payment. SO, my question(s to you, is his settlement payment now taxable and includible as income? Like if I'm filling out an application of any sort and it asks to list my annual gross income and any other income, do I have to list any of his above mentioned payments as other income? It's not considered income if it's not taxable, right?

A personal injury settlement is generally not taxable income unless any of the elements of the settlement would qualify as taxable income. Punitive damages, for example, could be taxable. Lost wages would be taxable. Taking the money and putting it into an annuity would not make the settlement taxable, but just as with any investment, earnings from the annuity would likely be taxable. However, if you agreed to accept an annuity in lieu of a lump sump, that would not be taxable.

I don't see any way that collecting VA disability benefits could turn a previous civil settlement into taxable income. There shouldn't be any connection between the two, unless there is something that I am unware of.

As far as filling out an application is concerned, it depends on what the application is for, but yes in general any income (whether its taxable or not) is income for the purpose of filling out an application.

You should really get a consult with a local tax professional who can review all of your paperwork and advise you. The "Code" is very difficult to follow even for those of us who are experienced with it. One of my professors, back in the day, said that the code was one of the most poorly written documents in the English language.

 

[kbe]

My main concern was section 104 (b) (4). It states:

Amount excluded to be not less than veterans’ disability compensation

In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans’ Administration.
US CODE: Title 26,104. Compensation for injuries or sickness

I forgot to tell you in the original post that the payments from both sources started back in 1997. We have never reported the income to our CPA because my husband has always been under the impression that's it's not taxable as he still believes. However, thank you for your time and expertise!! It means alot...

 

[LdiJ]

My main concern was section 104 (b) (4). It states:

Amount excluded to be not less than veterans’ disability compensation

In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans’ Administration.
US CODE: Title 26,104. Compensation for injuries or sickness

I forgot to tell you in the original post that the payments from both sources started back in 1997. We have never reported the income to our CPA because my husband has always been under the impression that's it's not taxable as he still believes. However, thank you for your time and expertise!! It means alot...

If you have never reported it, and the IRS has not been sending you CP2000 letters stating that you left it off your tax return, then most likely it is not taxable. Anything of significant taxability get reported independently to the IRS, by the payer. However, by all means discuss it with your CPA.