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From the Financial Hotline

By: Financial Hotline
Summer 2021 (Vol. 39, No. 2)

Q: I received an SBA loan for small businesses under the Covid-19 EIDL program. Originally my first loan payment was due in June of 2021 but when I went to pay it shows a later date. Was there a change?

A: The U.S. Small Business Administration announced extended deferment periods for all disaster loans, including the COVID-19 Economic Injury Disaster Loan (EIDL) program, until 2022. All SBA disaster loans made in calendar year 2020, including COVID-19 EIDL, will have a first payment due date extended from 12-months to 24-months from the date of the note. All SBA disaster loans made in calendar year 2021, including COVID-19 EIDL, will have a first payment due date extended from 12-months to 18-months from the date of the note.

Q: I am currently negotiating a settlement for an injury that occurred at work. Will I have to report the payout on my taxes?

A: That depends. Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries (usually nontaxable) and the second group is for claims relating to non-physical injuries which are usually taxable. Within these two groups, the claims usually fall into three categories:

  1. Actual damages resulting from physical or non-physical injury.

  2. Emotional distress damages arising from the actual physical or non-physical injury.

  3. Punitive damages.

Here are some key points to consider:

Consult a tax professional before you settle. Many people do not realize they may have taxes due until they receive a 1099 so be sure to do some tax planning.

Origin of claim. This is legal speak for “what did you ask for?” If you sued for lost wages, then the payment received will be considered income and taxed as wages. On the other hand, if you are suing for medical expenses or damages to your property value, the award would probably not be considered as income.

Be clear on what is physical and what is emotional. In general, personal injury awards are not taxable but be careful to check for exceptions. The payments for physical injuries and physical sickness are tax-free, but symptoms of emotional distress are not considered physical. Since 1996, your injury must be “physical.” If you sue for intentional infliction of emotional distress, your recovery is taxed. Physical symptoms of emotional distress (like headaches and stomachaches) probably would be taxed, but physical injuries or sickness is generally nontaxable. There are many cases where the tax liability is hard to call. For example, if you are awarded money because harassment from your boss caused your frequent headaches, it could be argued the headaches are physical, but they also may be classified as manifestations of emotional distress. It is harder to fight the differences once the 1099 is issued; it’s best to sort it out now before you sign a settlement.

Watch out for taxes on attorney’s fees. If your award is considered nontaxable, this won’t apply to you. But if it is taxable (even if the opposing side pays your attorney directly) you could still be charged that fee for tax purposes. Changes to tax laws in the past years also eliminated the deduction for legal fees. That means if you are awarded $100,000 and $33,000 goes to your lawyer, you could get a tax bill based on the full $100,000.

Know the difference between compensatory damages and punitive damages. Compensatory damages are meant to compensate the victim. It reimburses you for your expenses and for the income you lost. Punitive damages are meant as punishment to the defendant. The main difference is punitive damages are always taxable.

Q: I received an inheritance, and I deposited the resulting cashier’s check for $12,000 in my bank account. My bank gave me notice that they were required to report the deposit to the IRS. The inheritance is nontaxable so why would they do that?

A: The reporting is not about your tax liability. The Bank Secrecy Act requires that trades and businesses report cash payments of more than $10,000 to the federal government by filing IRS Form 8300. The information contained in the form assists law enforcement in its anti-money laundering efforts. When businesses comply with the reporting laws they provide authorities with an audit trail to investigate possible tax evasion, drug dealing, terrorist financing and other criminal activities. The law is not limited to banks. A cashier’s check or money order is considered the same as cash. Any business that receives a payment of $10,000 or more in cash or cash equivalent must report the transaction using form 8300.

Q: My mother passed away recently leaving a timeshare with expensive monthly fees that I do not want to keep. Can I be forced to inherit it?

A: It is possible to decline all or any any part of an inheritance and any responsibilities that go with it. You can refuse to inherit the time share but it isn’t as easy as just saying no. Each state has a specific process for you to disclaim an inheritance and there are usually timelines to consider. The first rule is do not accept or use the asset in way. If you enjoy any benefits from the asset you are declining, that may be construed as accepting it. That means, don’t go for one last vacation in mom’s timeshare.

Your inheritance disclaimer must be in writing and specifically state that you refuse to accept the assets in question and that this refusal is irrevocable. That means it is permanent. Once you refuse it you can’t reverse it.

Don’t delay, most states only give you nine months to make the disclaimer. If the beneficiary is a minor, they have until nine months after they reach legal age.

Be sure to check the guidelines in your state. For example, some states might require that a disclaimer be notarized or witnessed. Some require it to be sent only to the executor of the estate, while others require it to be recorded on public record.

Once you sign off on a refusal to inherit, the assets you would have received are passed on to the next closest heir. Therefore, if you are wanting an asset to pass to a specific person, you will need to be sure they are next in line to inherit. If they don’t want it either, they will also need to formally disclaim the inheritance.