At Cavey and Barrett we see this issue all the time and, quite frankly, there doesn’t seem to be a uniform approach to this issue among Long Term Disability carriers.
If you have to use all or part of your Social Security back payment to reimburse a Long Term Disability carrier, there is special tax relief available under section 1341 of the Attorney of Revenue Code. Nancy Cavey, an experience Long Term Disability attorney, suggests that you see IRS publication 525.
If a repayment to the Long Term Disability carrier is under $3,000, you will get a deduction on your current tax return. However, for repayments over $3,000, the tax payer can choose either the reduction or tax break for the excess tax paid in the prior year.
Unfortunately, we see Long Term Disability carriers issuing 1099’s that cause “phantom” taxable income. Sometimes it takes months to get this issue resolved with the Long Term Disability carrier.
Nancy Cavey, an experienced Long Term Disability attorney can answer your basic questions regarding the taxability of your Long Term Disability benefits.