Individual - Federal and State level - Taxability of state disability insurance proceeds
We have researched both the federal and
state tax ramifications of the state disability insurance proceeds
received during fiscal year 2004. Our understanding of the facts the way
you described them to us during our April 05, 2005 conference call are
as follows: 1) During 2005 you have been the beneficiary of state
disability payments. 2) Your employer has withheld out of your net pay
the cost of state disability insurance premiums. 3) The premiums
withheld of your net pay have been deposited state agency by your
employer.
FEDERAL LEVEL The definition of gross
income in accordance with the current tax code is: all income from
whatever source derived”. The issue at hand is to identify a specific
code section that allows you to exclude the payments of state disability
insurance received from the state agency. The disability insurance
proceeds received “through accident or health insurance for personal
injuries or sickness (or through an arrangement having the effect of
accident or health insurance)” is specifically excluded from gross
income by code section 104(a)(3). The exclusion is valid only if certain
requirements are met. The first requirement is that the benefits are not
being paid by your employer while the second requirement is concerned
with insurance premiums paid on your behalf by your employer that have
not been included in your gross income. Furthermore Treasury Regulations
Regulations 1.104-1(d) shed more light on insurance proceeds received by
you and paid with your own funds.
STATE LEVEL California conforms to IRC104
concerning compensation for injuries or sickness (California Revenue and
Taxation Code 17131). Amounts received through accident or health
insurance for personal injuries or sickness attributable to the
taxpayer's own contributions are excluded from gross income of the
taxpayer. Since the proceeds have been disbursed by a state agency and
your employer has not cover the cost of your insurance premiums but the
funds have been withheld from your wages it is our conclusion based upon
the state facts and the relevant authority cited that the proceeds
received by you during the fiscal year 2004 are tax exempt.
If you would like to discuss any of these matters in more detail, please
e-mail us.
Very truly yours, TaxCaffe
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