Last year, I was involved in an auto accident that resulted in considerable loss of income on my behalf. A claim was submitted to the at fault insurer’s adjuster for my lost wages, and behold, they agreed to pay!
The problem: The adjuster states that the IRS prevents them from paying in full, but rather, requires a payment of this kind not to exceed 80% of the amount claimed. In other words: “We’d love to pay you the full amount, but the mean old IRS won’t let us”.
In my research of this subject, I have yet to come across any reference to such an IRS rule.
I understand that any proceeds received for lost wages are taxable, so I asked if the 20% shortfall was perhaps going to be sent to the IRS as payment on my tax liability, and the answer was a terse NO!, (that was THEIR money).
Any insight into this matter would be greatly appreciated.
Internal Revenue Manual 5.15.1.20 Determining Equity in Assets
*4. The Quick Sale Value (QSV) of an asset is an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the seller to sell in a short period of time, usually 90 days or less. Generally, the QSV is calculated at 80% of the fair market value. A higher or lower percentage may be appropriate depending on the type of asset and current market conditions. *
I don’t really see how this applies to your situation but maybe they figure that you’re being reimbursed for something that was taken under duress and therefore that’s a Quick Sale and should be valued at 80%. maybe.
I thought about suggesting that you call the IRS but then I remembered that the last three times I tried that I spent an average of 40 minutes on hold before finally getting a human who told me an answer… but it was the wrong answer. I read an article 10 years ago about a tax lawyer who called the IRS hotline and asked them a question to which he already knew the answer, just to see if the IRS people would get it right, and more than half of them got it wrong.
It could conceivably be a peculiarity of the state you’re living in, but it sounds like bullshit to me. As far as I know (I’m an injury adjuster, by the way) NONE of your settlement is taxable, not even any amount intended to compensate you for lost wages. You lose $2,000 in wages due to your injury? You get $2,000. Not $2,000 less what your recent tax liability has been, not 80% of $2,000. $2,000. Seeing as how the IRS works with the federal government, I would suspect the same rules apply no matter what state you’re living in. Besides, your tax liability is your business, it’s not the insurance company’s job to make sure you play straight with the IRS (and again–in my experience, a settlement like the one you describe is NOT a taxable event).
Call bullshit on your adjuster and make them cite you the statute or reg that prevents you getting 100%. If they don’t, and they insist on cutting you short, talk to an attorney. But be warned, if you actually hire the attorney to manage your case for you, they’ll likely take significantly more than the insurance company is ‘withholding’ from you, so it may not be of benefit. However, if they’re lying to you/mistaken about the wage replacement, it’s reasonable to assume the rest of your settlement is going to be light as well.
Well, you are right in that taxes are rarely with-held. But a award for lost wages is generally taxable, juts like the wages were. Oddly, not FICA & FUTA, etc.
Mmmmnope. Taxable elements of a personal injury claim are punitive awards and interest awarded on a verdict. Typical out of court settlement that includes reimbursement of medical costs, wage loss, and pain & suffering = no tax.
Compensation for Lost Income
Generally speaking, any settlement or judgment amount you receive as compensation for lost income is subject to income tax. The reasoning is that your original income would have been taxable had you not suffered the income loss, so any compensation intended to replace that same lost income should be taxable as well.
If your settlement or judgment includes compensation for other types of losses in addition to lost wages, such as medical bills, you must still pay taxes on that portion of the settlement or judgment that is attributable to the lost wages.
Settlements for personal injury are not taxable income for federal income tax purposes. If any portion of the settlement is designated for lost wages, that portion of it is reportable and taxable.
Done diggin. Retraction and apologies (with slight reservation) to DrDeth. OK, talk to a lawyer in your state. Technically the wage loss may be taxable.
BUT: In practice, you sign the release, you get a check. Under the terms of the release (read yours when you get it) liability is typically expressly NOT admitted and the various sorts of damages being compensated are not broken down. For all anyone knows, the entire settlement amount is for pain. That changes in the event of a jury trial, where the verdict may be more explicit about how much is being allocated to a particular item of damages. I have never heard of an insurer reporting the outcome of a settlement, whether by a release or a jury verdict, to the IRS. Same goes for withholding.
True. But it cant hurt to ask that the damages be specified as General rather than “replacement for lost wages” even if the lost wages were what that figure was based on.
IME, the best practice when you suspect someone is feeding you a line about restrictions imposed for whatever is to require whoever is making the claim for a specific reference.
‘That’s the way it’s done.’ isn’t an acceptable cite.
My hunch is that my adjuster is offering a settlement based on physical pain & suffering combined with loss of wages… All lumped together under the umbrella of “general damages” that would be not taxable under IRS guidelines. For this tax “benefit” to me, her company scalps a 20% reduction in my documented loss of wages. This kind of settlement would ultimately be a win-win, (for me and the insurance company) albeit somewhat shady. So far, there has been no answer to my request for an IRS citation to back her claim of the supposed 80/20 “rule”… Nor can she provide me with information as to how the settlement would be characterized for tax purposes.
I just don’t think she has adequate knowledge about what she is being instructed to do with me, nor the communication skills necessary to make her position clear.
Thanks to all, for taking time out of your day to help.
After a year and some months since my initial post…
Some unsolicited advice: If you are involved in an accident (not your fault) GET A LAWYER! Do NOT represent yourself.
Based on anecdotal information garnered since my decision to “be reasonable” with the insurance companies… I got screwed. Others who suffered similar circumstances who chose to be represented by an attorney faired much better than I did, even after fees .
Don’t let your ego stand in the way of obtaining the best settlement possible. Insurance companies love idiots like me, who go through the settlement process without legal representation.
I dealt directly with an insurance company many years ago and I feel I got a fair settlement, but in the end we volleyed hundreds of carefully worded letters for about eighteen months whereas an attorney would have likely made a ten minute phone call and given me 75% within a week.
This is nonsense. It’s possible that your state law limits recovery for wage loss, though.
As a civil defense attorney, I do encourage people to retain counsel if they are injured (at work, in an auto accident, whatever). I do this for a living and I wouldn’t handle anything more complicated than a property damage claim on my own.
Yes, I received 80% of lost wages, “Blue Book” for the vehicle, (which was not near enough to replace it in kind) and nothing in pain & suffering for two fractured ribs, (broken clear in two) one more cracked, a severe concussion, and the usual garden variety of contusions, cuts, etc.
After much research and pressing them pretty hard, they finally admitted that the 80% crapolla was “just their policy”.
