Multiple years of disability payments included in W-2

[David]

Client received a 2016 W-2 from an insurance party for third party sick pay from September 2014 - December 2016. The information doesn't indicate how much is related to each year.

I can't find any cites that allow a lump sum treatment by spreading the amounts to the appropriate years and adjusting the related tax such as would be allowed when social security disability payments are paid in this manner.

Before I treat all of the W-2 income as 2016 income, I wanted to check and see if anyone knows of a cite that would allow the income to be spread across the appropriate years for tax purposes. If so, how and where is this adjustment made?

Thanks.

[BulldogTom]

Yuk!  Is it all on a 2016 W2?  Can you confirm that the payments were made in 2014 and 2015 as well as 2016?  Did the client actually get all the money in 2016 because there was a dispute with the insurance company and they just got all the money in 2016?

This is no fun.  (Taxes is supposed to be fun...right)  You have some detective work to do.

Tom
Newark, CA

[David]

The client received a letter from the insurance department stating that her disability payments would begin 9/1/14 and what the amount she would receive in 2016 would be, including the 2014 and 2015 payments. I can easily divide by 28 months to determine what amount is paid for each year.

However, I don't see anything that allows me to recalculate the tax based on the amounts received for prior years. There is an option to do this if it is social security payments. The amounts per year are stated on the SSA-1099 in those cases.

Since the amounts per year aren't stated on the W-2, I thought that my understanding was correct that there is no adjustment available.

Please let me know if there is a cite somewhere that allows the tax for the W-2 income to be recalculated based on the amounts per prior years and how I would report that.

Thanks.

[BulldogTom]

So you are saying your client received the money in 2014 and 2015 and 2016?  But the insurance company did not send W2's for 2014 and 2015 and put all the income on 2016?

If you can prove that, I think you can amend the tax returns and then fight it out when the letter comes.  You would have to do a cost/benefit analysis for your client to see if the tax reduction would cover your fees for the 2 amended returns and the inevitable letter from the IRS for the mismatch.

Tom
Newark, CA

[jklcpa]

3 hours ago, David said:

disability payments would begin 9/1/14 and what the amount she would receive in 2016 would be, including the 2014 and 2015 payments.

The way this is worded, I think that the disability awarded is based on the time period going back to Sept 2014 but all was received in 2016.

I don't have a lot of time to research this, but it depends on if it is paid under statute or not. For example, back pay that is awarded under National Labor Board is reported in the year that it should have been paid as described here at 4.2.2.8, and I think there was some post on our forum here last year, possibly having to do with a CA union employee, if memory serves it was a firefighter. (Edit: it was a police officer.  Link to that topic).

Other than that special rule, the back pay is generally reported in the year it is paid, so for David's client I think this is all reportable in 2016.  David, please see this pub 957, second paragraph under #1.

Edited March 22, 2017 by jklcpa
memory is shot, obviously!

[David]

Thanks so much for taking the time to help.