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DISABILITY HEADACHE
September 20, 2007
Richard Cotler planned wisely. When he was in practice as an attorney in Florida, he participated in a group disability insurance policy.
Mr. Cotler's wise planning paid off when he was hit with debilitating headaches. They were so bad that he had to give up his law practice, and he eventually forced into bankruptcy. Fortunately, his disability policy kicked in, providing him an income.
Unfortunately, the IRS said that Mr. Cotler's P.C. had paid his disability insurance. If you pay your own disability insurance, or if your employer pays on your behalf out of your after-tax earnings, any income you later get from the policy is tax-free.
The Tax Court got involved. Judge Vasquez found that while the paper trail could have been better, Mr. Cotler had reimbursed the P.C. for the premiums out of his own pocket, and therefore his proceeds were tax free.
The Moral? Everyone of working age should have a disability policy. If you want any proceeds to be tax-free, make it clear who that you are paying for the policy out of your own after-tax dollars.
Cite: Cotler, T.C. Memo 2007-283
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